Fitch Ratings – New York – 12 Mar 2021: Fitch Ratings has assigned ratings and Rating Outlooks to Octagon 52, Ltd.
|Octagon 52, Ltd.|
Octagon 52, Ltd. (the issuer) is an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Octagon Credit Investors, LLC. Net proceeds from the issuance of the secured and subordinated notes will provide financing on a portfolio of approximately $550 million of primarily first lien senior secured leveraged loans.
KEY RATING DRIVERS
Asset Credit Quality (Negative): The average credit quality of the indicative portfolio is ‘B’/’B-‘, which is in line with that of recent CLOs. Issuers rated in the ‘B’ rating category denote a highly speculative credit quality; however, the class A notes benefit from credit enhancement of 36.0% and standard U.S. CLO structural features.
Asset Security (Positive): The indicative portfolio consists of 98.0% first lien senior secured loans and has a weighted average recovery assumption of 74.6%. Fitch Ratings stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses.
Portfolio Composition (Positive): The largest three industries may constitute up to 40.0% of the portfolio balance in aggregate, while the top five obligors can represent up to 12.5% of the portfolio balance in aggregate. The level of diversity required by industry, obligor and geographic concentrations is in line with other recent U.S. CLOs.
Portfolio Management (Neutral): The transaction has a 5.1-year reinvestment period and reinvestment criteria similar to other U.S. CLOs. Fitch’s analysis was based on a stressed portfolio created by adjusting the indicative portfolio to reflect permissible concentration limits and collateral quality test levels.
Cash Flow Analysis (Positive): Fitch used a customized proprietary cash stream model to replicate the principal and interest waterfalls and assess the effectiveness of various structural features of the transaction. In our stress scenarios, the class A notes can withstand default rates of up to 61.0% assuming a portfolio recovery rate of 36.6% Fitch’s ‘AAAsf’ scenario.
Factors that could, individually or collectively, lead to positive rating motion/upgrade:
Upgrade scenarios are not applicable to the class A notes, as these notes are in the highest rating category of ‘AAAsf’.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Variability in key model assumptions, such as decreases in recovery rates and increases in default rates, could result in a downgrade. Fitch evaluated the notes’ sensitivity to potential modifications in such metrics. The results under these sensitivity scenarios are between ‘BB+sf’ and ‘AAAsf’ for class A notes.
Additional Near-Term Stress Scenario
As outlined in “Fitch Ratings Expects to Revise Significant Share of CLO Outlooks to Stable,” dated Jan. 22, 2021. Fitch also applied a near-term stress scenario to the portfolio that envisages negative credit migration driven by half of the assets with a Negative Rating Outlook; this scenario was not used to derive Fitch’s rating action. Under this stress the class A notes can withstand default rates above their respective PCM hurdle rates.
Key Rating Drivers and Rating Sensitivities are further described within the new issue report, which is available to investors at www.fitchratings.com.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Structured Finance transactions have a best-case rating improve scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (outlined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAAsf’ to ‘Dsf’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
The sources of information used to assess these ratings were provided by the arranger (BofA Securities, Inc.) and the public domain.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction’s representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering doc and which relate to the underlying asset pool was not ready for this transaction. Offering Documents for this market sector typically do not include RW&Es that are available to investors and that relate to the asset pool underlying the trust. Therefore, Fitch credit reports for this market sector will not typically include descriptions of RW&Es. For further information, please see Fitch’s Special Report titled ‘Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions’.
Additional information is available on www.fitchratings.com