Fitch Rates Regatta VI Funding Ltd./LLC
--\\$3,000,000 class X notes 'AAAsf'; Outlook Stable;
--\\$252,000,000 class A notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D, E, S1, S2, P or subordinated notes.
TRANSACTION SUMMARY
Regatta VI Funding Ltd. (the issuer) and Regatta VI Funding LLC (the co-issuer) constitute an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Regatta Loan Management LLC (RLM). Net proceeds from the issuance of the secured notes and subordinated securities will be used to purchase a portfolio of approximately \\$400 million primarily senior secured leveraged loans. The CLO will have an approximately 4.2-year reinvestment period and a 2.2-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 37% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. The degree of CE available to class A notes is in line with the average CE of recent CLO issuances. Class X notes are ultimately expected to be paid in full primarily from the application of interest proceeds via the interest waterfall.
'B+/B' Asset Quality: The average credit quality of the indicative portfolio is approximately 'B+/B', which is comparable with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class X and A notes are unlikely to be affected by the foreseeable level of defaults. Class X and A notes are projected to be able to withstand default rates of up to 100% and 60%, respectively.
Strong Recovery Expectations: The indicative portfolio consists of 99.6% first lien senior secured loans. Approximately 95.7% of the indicative portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher and the base case recovery assumption is 81%. In determining the class X and A note ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses, resulting in a 37.5% recovery rate in Fitch's 'AAAsf' scenario.
Fitch's interest rate stress criteria provides for the application of standard (positive) downwards stresses, instead of negative interest rate stresses, in its analysis of transactions that are not expected to be affected by negative interest rates. Since U.S. CLOs are unlikely to be affected by negative interest rates due to the prevalence of LIBOR floors in the U.S. loan market, Fitch applied the standard (positive) interest rate downwards stress in its analysis of the class X and A notes.
RATING SENSITIVITIES
Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions including decreases in weighted average spread or recovery rates and increases in default rates or correlation. Fitch expects the class X and A notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios were consistently 'AAAsf' for the class X notes and ranged between 'A+sf' and 'AAAsf' for the class A notes.
Fitch published an exposure draft of its Counterparty Criteria for Structured Finance and Covered Bonds on April 14, 2016. The exposure draft serves as the operative criteria report for this ratings analysis. Under the exposure draft, a direct support counterparty is expected to maintain a long-term rating of at least 'A' or a short-term rating of at least 'F1' in order to support note ratings of up to 'AAAsf'. The issuer's account holder, U.S. Bank N.A., satisfies the minimum expected ratings threshold for a direct support counterparty under the exposure draft framework.
Fitch's existing counterparty criteria (dated May 14, 2014), as well as the issuer's governing documents, expects this role to be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1'. U.S. Bank, N.A. has a long-term and short-term rating that currently meets this expectation. Therefore the rating recommendation for class X and A notes remains achievable under Fitch's existing criteria.
The framework regarding expectations for qualified investments has not materially changed between the existing criteria and the exposure draft.
Key Rating Drivers and Rating Sensitivities are further described in the new issue report, which will be available shortly to investors on Fitch's website at 'fitchratings.com'.
VARIATIONS FROM CRITERIA
Fitch currently addresses operational risk considerations of CLO managers through on-site reviews every two years and updates its assessment as necessary on any organizational changes. The criteria variation from Fitch's Global Rating Criteria for CLOs and Corporate CDOs arises from the fact that the last on-site review was conducted more than two years ago. Fitch continues to deem RLM as an acceptable CLO manager.
DUE DILIGENCE USAGE
No third-party due diligence was provided or reviewed in relation to this rating action.
The publication of a representations, warranties and enforcement mechanisms appendix is not required for this transaction.
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