OREANDA-NEWS. November 10, 2015. Fitch Ratings has upgraded Harbourmaster CLO 10 B.V.'s class A3 and A4 notes, as follows:

EUR59.5m Class A2 (XS0331143973): affirmed at 'AAAsf'; Outlook Stable
EUR24.0m Class A3 (XS0331156108): upgraded to 'AAAsf' from 'AA-sf'; Outlook Stable
EUR41.0m Class A4 (XS0331171081): upgraded to 'BBB+sf' from BBB-sf'; Outlook Stable
EUR22.0m Class B1 (XS0331161017): affirmed at 'BB-sf'; Negative Outlook
EUR9.0m Class B2 (XS0331162684): affirmed at 'B-sf'; Negative Outlook

Harbourmaster CLO 10 B.V. is a managed cash arbitrage securitisation of secured leveraged loans, primarily domiciled in Europe. The portfolio is managed by Blackstone/GSO Debt Funds Europe Limited.

KEY RATING DRIVERS
The upgrades reflect the improvement in credit enhancement (CE) over the past 12 months. The class A1 notes have been paid in full and the class A2 notes have been paid down by EUR12.5m, which increased the CE for all rated notes. CE for the class A3 and A4 notes increased by 20.8% and 12.3%, respectively.

The overcollateralisation (OC) tests have also improved following the principal payments. The most junior class B2 OC test increased to 120.6% from 109.9% and is now passing with 14.5% cushion, which will prevent additional proceeds from transferring into the suspense accounts. There are EUR10m in the suspense accounts, unchanged from the last review. Fitch has no view on when these will be released. The class A2 interest coverage (IC) test has been passing since closing and currently stands at 1191.5%, above its threshold of 107%.

There has been negative rating migration in the portfolio, which increased the Fitch weighted average rating factor to 31.7 from 29.8 at last review, above the threshold of 30. The Fitch weighted average recovery rate decreased to 71.0% from 72.3%, below the trigger of 72.0%. The failures of both tests have less impact on the transaction as the unscheduled proceeds have not been able to be reinvested since 2010. There are no current default assets compared with EUR10m at last review.

The Negative Outlooks on the class B1 and B2 notes reflect the uncertainty around the default definition in the OC test calculation, which has been ongoing since 2009 (see "Fitch Places 11 Tranches from 6 Harbourmaster CLO on Rating Watch Negative" dated 16 September 2009 on www.fitchratings.com). No resolution has been reached and Fitch has no further visibility on a potential outcome. Fitch notes that despite pending resolution, the trustee calculates the OC ratios differently by including defaulted assets at the lower of market value and recovery estimates instead of at par.

RATING SENSITIVITIES
Increasing the default probability by 25% would likely result in a downgrade of up to three notches. Furthermore, applying a recovery rate haircut of 25.0% on all the assets would likely result in a downgrade of zero to two notches.

DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. There were no findings that were material to this analysis.

Fitch did not undertake a review of the information provided about the underlying asset pools ahead of the transaction's initial closing. The subsequent performance of the transactions over the years is consistent with the agency's expectations given the operating environment and Fitch is therefore satisfied that the asset pool information relied upon for its initial rating analysis was adequately reliable.

Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

SOURCES OF INFORMATION
The information below was used in the analysis:
-Loan-by-loan data provided by Deutsche Bank as at 30 September 2015
-Transaction reporting provided by Deutsche Bank as at 30 September 2015