S&P: All Ratings Raised On Ares European CLO II's Cash Flow CLO Notes Following Review And Increased Credit Enhancement
Today's upgrades follow our assessment of the transaction's performance using data from the June 30, 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 June 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 "Ratings Raised In Cash Flow CLO Transaction Ares European CLO II Due To Improved Credit Quality"). As a result, the portfolio has become more concentrated with 73 obligors remaining compared with 115 at our previous review.
Over the same period, the weighted-average spread has decreased marginally to 3.61% from 3.86%, but remains well above the covenant of 3.15%. The portfolio's weighted-average life has also decreased, to 4.03 years from 4.82 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 D notes, increasing to 120.69% from 112.65%, well above the trigger level of 110.94%.
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 all classes of notes to be commensurate with higher ratings than those currently assigned. We have therefore raised our ratings on all classes of notes.
Ares European CLO II is a cash flow collateralized loan obligation (CLO) transaction that securitizes loans to primarily speculative-grade corporate firms. The transaction closed in December 2007, and its reinvestment period ended in May 2015.
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