Fitch Rates NewStar Commercial Loan Funding 2015-2 LLC
--\\$205,000,000 class A-1 notes 'AAAsf'; Outlook Stable;
--\\$23,000,000 class A-2 notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class B, C, D or E notes or the membership interests.
TRANSACTION SUMMARY
NewStar Commercial Loan Funding 2015-2 LLC (the issuer) is a middle-market (MM) collateralized loan obligation (CLO) that will be managed by NewStar Financial, Inc. (NewStar). Net proceeds from the issuance of the secured notes and membership interests will be used to purchase a portfolio of \\$400 million of MM 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 43% for class A-1 and class A-2 notes (collectively, class A notes), in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. CE is significantly higher than the levels typically seen on broadly syndicated CLOs and is in line with levels seen on recent Fitch-rated MM CLOs.
'B/B-' Asset Quality: Fitch Ratings expects the credit quality of the underlying obligors to primarily fall in the 'B/B-' range. Fitch's base case analysis centered on a portfolio with a weighted average rating factor (WARF) of 43, in accordance with the initial expected matrix point. The analysis on such portfolio, in addition to analysis on the other permitted matrix points, indicated the class A notes demonstrate cash flow performance in line with other 'AAAsf' CLO notes. In the base case analysis, class A notes are projected to withstand default rates of up to 76.9%.
Strong Recovery Expectations: The transaction requires a minimum of 90% of the portfolio to consist of senior secured loans, cash and eligible investments, while portfolio management is governed in part by a Fitch weighted average recovery rate (WARR) test. In its base case analysis of the class A notes, Fitch adjusted the WARR of the portfolio to reach the base case minimum trigger of 71.5%, and further reduced recovery assumptions for higher rating stress scenarios. The base case analysis of class A notes assumed a 37.1% recovery rate in Fitch's 'AAAsf' scenario.
COUNTERPARTY CRITERIA APPLICATION
Provisions for the eligible investments to be purchased with intra-period interest and principal collections, as well as the rating requirements of the institutions at which the issuer's various bank accounts will be established, conform to Fitch's counterparty criteria for supporting note ratings of up to 'AAAsf'. Eligible investments are required to mature or be putable at par prior to the next payment date. Requirements for other counterparties, such as the trustee and the custodian, also conform to Fitch criteria.
Provisions for the concentration account, which will hold proceeds from underlying obligors for no more than two business days before being swept into the issuer's bank accounts, include rating triggers and remedial provisions that do not fully meet Fitch counterparty criteria expectations. Fitch criteria expect the institution maintaining such accounts to preserve ratings of at least 'A' and 'F1' and, upon downgrade below these levels, to be replaced with an institution meeting such ratings within 30 days. The concentration account documents feature replacement provisions that are triggered after a downgrade below 'F1', with no long-term rating provisions, and require replacement with another party rated at least 'F1', but with no prescribed time frame.
Fitch logged an exception to its criteria in relation to the concentration account provisions that do not fully conform to the criteria expectations. Fitch views the risk presented by the concentration account provisions as remote, and believes sufficient mitigants to the nonconformity to criteria exist. The account is held at Wells Fargo Bank, N.A. (rated 'AA'/'F1+'/Stable Outlook by Fitch), and replacement provisions upon a rating downgrade are present, albeit not strictly in conformance with criteria expectations. Fitch notes that the account is expected to be swept daily and believes that the maximum exposure period of two business days is not likely to result in material risk to class A notes. Class A notes would benefit from other structural mechanisms in the event of the loss of funds held in this account (e.g. principal for interest and/or the availability of excess spread).
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-1 and class A-2 notes to remain investment grade, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'A+sf' and 'AAAsf' for the class A-1 and class A-2 notes.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
The publication of a RW&Es appendix is not required for this transaction.
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