OREANDA-NEWS. S&P Global Ratings today raised its credit ratings on Ares Euro CLO I B. V.'s class A-2 to F notes. At the same time, we have affirmed our 'AAA (sf)' rating on the class A-1 notes (see list below).

Today's rating actions follow our assessment of the transaction's performance using data from the May 4, 2016 trustee report and the application of our relevant criteria (see "Related Criteria").

We subjected the capital structure to a cash flow analysis to determine the break-even default rate (BDR) for each rated class at each rating level. The BDR represents our estimate of the maximum level of gross defaults, based on our stress assumptions, that a tranche can withstand and still fully repay the noteholders. In our analysis, we used the portfolio balance that we consider to be performing, the current spreads as reported by the trustee report, and the recovery rates calculated in line with our corporate collateralized debt obligation (CDO) criteria (see "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2015). We applied various cash flow stresses, using our standard default patterns, in conjunction with different interest rate stress scenarios. We used the reported portfolio balance that we considered to be performing, the principal cash balance, the weighted-average spread, and the weighted-average recovery rates that we considered to be appropriate.

Since our Oct. 30, 2014 review, the notes have amortized further resulting in almost double the amount of credit enhancement being available to the notes at each rating level (see "Various Rating Actions Taken In European Cash Flow CLO Transaction Ares Euro CLO I Following Performance Review"). As a result, the portfolio has become more concentrated with 61 obligors remaining compared with 95 at our previous review.

Over the same period, the weighted-average spread has decreased marginally to 3.39% from 3.56%, but remains well above the covenant of 3.05%. The portfolio's weighted-average life has also decreased, to 4.53 years from 5.23 years. As a result of the growth in credit enhancement, the overcollateralization (OC) test ratios have also improved significantly with the junior OC test, relating to the class F notes, increasing to 107.70% from 102.91%.

We incorporated various cash flow stress scenarios, using various default patterns, levels, and timings for each liability rating category, in conjunction with different interest rate stress scenarios. To help assess the collateral pool's credit risk, we used CDO Evaluator 6.3 to generate scenario default rates (SDRs; the modeled level of gross defaults that CDO Evaluator estimates for every CDO liability rating) at each rating level. We then compared these SDRs with their respective BDRs.

Taking into account our observations outlined above, we consider the available credit enhancement for the class A-2, A-3, B-1, B-2, C, D, E, and F notes to be commensurate with higher ratings than those currently assigned. We have therefore raised our ratings on these classes of notes.

Our analysis also indicates that the available credit enhancement for the class A-1 notes is commensurate with the currently assigned rating. We have therefore affirmed our 'AAA (sf)' rating on the class A-1 notes.

Of the portfolio, 15% comprises non-euro-denominated assets that are hedged under a cross-currency swap agreement. In our opinion, the downgrade remedies for these cross-currency swaps do not fully comply with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). Therefore, we have also considered scenarios where the derivative counterparty does not perform, exposing the transaction to greater exchange rate risk.

Ares Euro CLO I is a cash flow collateralized loan obligation (CLO) transaction that securitizes loans to primarily speculative-grade corporate firms. The transaction closed in April 2007, and its reinvestment period ended in May 2014.