OREANDA-NEWS. Fitch Ratings expects to assign the following ratings and Rating Outlooks to Babson CLO Ltd. 2016-II:

--$2,500,000 class X notes 'AAA(EXP)sf'; Outlook Stable;

--$252,000,000 class A notes 'AAA(EXP)sf'; Outlook Stable.

Fitch does not expect to rate the class B, C, D, E notes or subordinated notes.

TRANSACTION SUMMARY

Babson CLO Ltd. 2016-II (the issuer) and Babson CLO 2016-II, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Babson Capital Management LLC (Babson Capital). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $400 million of primarily senior secured leveraged loans. The CLO will have an approximately four-year reinvestment period and two-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 the 'AAAsf' stress scenario. The degree of CE available to the class A notes is in line with the average CE of recent CLO issuances. Class X notes are expected to be paid in full from the application of interest proceeds.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable to 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 robust against default rates of up to 100% and 62.9%, respectively.

Strong Recovery Expectations: The indicative portfolio consists of 98.5% first lien senior secured loans. Approximately 94.8% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher and the base case recovery assumption is 80%. 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 of higher rating stress assumptions, resulting in a 38.3% recovery rate assumption in Fitch's 'AAAsf' scenario.

RATING SENSITIVITIES

Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions including decreases in recovery rates and increases in default rates or correlation. Fitch expects the class A notes to remain investment grade even under the most extreme sensitivity scenarios, with results under these sensitivity scenarios ranging between 'A+sf' and 'AAAsf'. The class X notes are expected to remain 'AAAsf' under even the most extreme sensitivity scenarios.