AlbaCore Euro CLO II DAC CLO Notes And A-1 Loan Assigned Ratings
| Ratings List | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Class | Rating | Amount (mil. €) | Interest rate | Credit enhancement (%) | ||||||
| A-1 | AAA (sf) | 60.50 | Three/six-month EURIBOR plus 0.83% | 38.00 | ||||||
| A-1 Loan | AAA (sf) | 155.00 | Three/six-month EURIBOR plus 0.83% | 38.00 | ||||||
| A-2 | AAA (sf) | 32.50 | Three/six-month EURIBOR plus 1.00%* | 38.00 | ||||||
| B | AA (sf) | 40.00 | Three/six-month EURIBOR plus 1.65% | 28.00 | ||||||
| C | A (sf) | 28.00 | Three/six-month EURIBOR plus 2.50% | 21.00 | ||||||
| D | BBB (sf) | 25.00 | Three/six-month EURIBOR plus 3.78% | 14.75 | ||||||
| E | BB- (sf) | 19.00 | Three/six-month EURIBOR plus 5.96% | 10.00 | ||||||
| F | B- (sf) | 12.00 | Three/six-month EURIBOR plus 8.41% | 7.00 | ||||||
| Sub. notes | NR | 36.35 | N/A | N/A | ||||||
| *The three/six-month EURIBOR for the class A-2 notes is capped at 2.20%. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable. | ||||||||||
Overview
- We have assigned our ratings to AlbaCore Euro CLO II's class A-1 Loan, and A-1, A-2, B, C, D, E, and F notes.
- Albacore Euro CLO II DAC is a European cash flow CLO transaction, securitizing a portfolio of primarily senior secured leveraged loans and bonds. The transaction is managed by AlbaCore Capital LLP.
LONDON (S&P Global Ratings) May 12, 2021--S&P Global Ratings today assigned its credit ratings to AlbaCore Euro CLO II DAC's class A-1 Loan, and A-1, A-2, B, C, D, E, and F notes. At closing, the issuer also issued unrated subordinated notes (see list above).
The ratings reflect our assessment of:
- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality tests.
- The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization.
- The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading.
- The transaction's legal structure, which is bankruptcy remote.
- The transaction's counterparty risks, which is in line with our counterparty rating framework.
Under the transaction documents, the rated notes pay quarterly interest unless there is a frequency switch event. Following this, the notes will permanently switch to semiannual payment.
The portfolio's reinvestment period will end approximately 4.3 years after closing, and the portfolio's maximum average maturity date will be 8.5 years after closing.
A notable feature in this transaction is the introduction of loss mitigation obligations. Loss mitigation obligations allow the issuer to participate in potential new financing initiatives by a borrower in default or in distress. This feature aims to mitigate the risk of other market participants taking advantage of CLO restrictions, which typically do not allow the CLO to participate in a defaulted entity new financing request, and hence increase the chance of increased recovery for the CLO. While the objective is positive, it may lead to par erosion as additional funds will be placed with an entity that is under distress or in default. This may cause greater volatility in our ratings if these loans' positive effect does not materialize. In our view, the restrictions on the use of proceeds and the presence of a bucket for the loss mitigation loans helps to mitigate the risk.
Loss mitigation obligation mechanics
Under the transaction documents, the issuer can purchase loss mitigation obligations, which are assets of an existing collateral obligation held by the issuer, offered in connection with bankruptcy, workout, or restructuring of the obligation, to improve the recovery value of the related collateral obligation.
The purchase of loss mitigation obligations is not subject to the reinvestment or eligibility criteria. They receive no credit in the principal balance definition--except where loss mitigation obligations meet the eligibility criteria, with certain exclusions, and are purchased using principal proceeds–-in which case they are afforded defaulted treatment in par coverage tests.
To protect the transaction from par erosion, any distributions received from loss mitigation obligations, which are afforded credit in the par coverage tests, will irrevocably form part of the issuer's principal account proceeds. The cumulative exposure to loss mitigation obligations is limited to 10% of target par.
The issuer may purchase loss mitigation obligations using either interest proceeds or principal proceeds. The use of interest proceeds to purchase loss mitigation obligations is subject to all interest coverage tests passing following the purchase, and the manager determining that there are sufficient interest proceeds to pay interest on all the rated notes on the upcoming payment date.
The use of principal proceeds is subject to passing par coverage tests and the manager having built sufficient excess par in the transaction so that the principal collateral amount is equal to or exceeds the portfolio's target par balance after the reinvestment.
To protect the transaction from par erosion, any distributions received from loss mitigation obligations that are either purchased with the use of principal--and have been afforded credit in the coverage tests--will irrevocably form part of the issuer's principal account proceeds and cannot be recharacterized as interest.
| Portfolio Benchmarks | |
|---|---|
| Current | |
| S&P Global Ratings weighted-average rating factor | 2,755.59 |
| Default rate dispersion | 528.77 |
| Weighted-average life (years) | 5.58 |
| Obligor diversity measure | 99.83 |
| Industry diversity measure | 18.14 |
| Regional diversity measure | 1.18 |
| Transaction Key Metrics | |
|---|---|
| Current | |
| Total par amount (mil. €) | 400.0 |
| Defaulted assets (mil. €) | 0 |
| Number of performing obligors | 115 |
| Portfolio weighted-average rating derived from our CDO evaluator | 'B' |
| 'CCC' category rated assets (%) | 0.75 |
| 'AAA' weighted-average recovery (%) | 36.07 |
| Covenanted weighted-average spread (%) | 3.65 |
| Reference weighted-average coupon (%) | 4.50 |
The portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow collateralized debt obligations (CDOs; see "Global Methodology And Assumptions For CLOs And Corporate CDOs," published on June 21, 2019).
In our cash flow analysis, we used the €400 million target par amount, the covenanted weighted-average spread (3.65%), the reference weighted-average coupon (4.50%), and the actual weighted-average recovery rates. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category.
Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned ratings (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).
The transaction's documented counterparty replacement and remedy mechanisms adequately mitigate the exposure to counterparty risk under our current counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," published on March 8, 2019).
The transaction's legal structure is bankruptcy remote, in line with our legal criteria (see "Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).
Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our ratings are commensurate with the available credit enhancement for the class A-1 Loan and A-1 to F notes. Our credit and cash flow analysis indicates that the available credit enhancement for the class B to D notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from closing, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes.
The class F notes' current break-even default rate cushion is -2.71%. Based on the portfolio's actual characteristics and additional overlaying factors, including our long-term corporate default rates and the class F notes' credit enhancement, this class is able to sustain a steady-state scenario, in accordance with our criteria (see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published on Oct. 1, 2012). Our analysis further reflects several factors, including:
- The class F notes' available credit enhancement is in the same range as that of other CLOs we have rated and that have recently been issued in Europe.
- Our model-generated portfolio default risk at the 'B-' rating level is 27.93% (for a portfolio with a weighted-average life of 5.58 years) versus 17.29% if we were to consider a long-term sustainable default rate of 3.1% for 5.58 years.
- Whether the tranche is vulnerable to nonpayment in the near future
- If there is a one-in-two chance for this note to default.
- If we envision this tranche to default in the next 12-18 months.
Following this analysis, we consider that the available credit enhancement for the class F notes is commensurate with the assigned 'B- (sf)' rating.
In addition to our standard analysis, to provide an indication of how rising pressures among speculative-grade corporates could affect our ratings on European CLO transactions, we have also included the sensitivity of the ratings on the class A-1 loan and A-1 to E notes to five of the 10 hypothetical scenarios we looked at in our publication "How Credit Distress Due To COVID-19 Could Affect European CLO Ratings," published on April 2, 2020. The results shown in the chart below are based on the actual weighted-average spread, coupon, and recoveries.
As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F notes.
S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.
Environmental, social, and governance (ESG) credit factors
We regard the exposure to ESG credit factors in the transaction as being broadly in line with our benchmark for the sector (see "ESG Industry Report Card: Collateralized Loan Obligations," published on March 31, 2021). Primarily due to the diversity of the assets within CLOs, the exposure to environmental credit factors is viewed as below average, social credit factors are below average, and governance credit factors are average. For this transaction, the documents prohibit assets from being related to the following industries: tobacco, hazardous chemicals, pesticides and wastes, pornography or prostitution, gambling, subprime lending, weapons or firearms, marijuana, and thermal coal mining or the generation of electricity using coal. Accordingly, since the exclusion of assets from these industries does not result in material differences between the transaction and our ESG benchmark for the sector, no specific adjustments have been made in our rating analysis to account for any ESG-related risks or opportunities.
Related Criteria
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Criteria | Structured Finance | CDOs: Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- ESG Industry Report Card: Collateralized Loan Obligations, March 31, 2021
- Credit Conditions Europe: New Horizons, Old Risk, March 30, 2021
- European Leveraged Finance And Recovery Fourth-Quarter 2020 Update: Leverage Increases, Recovery Slips, Feb. 1, 2021
- European Economic Snapshots: Policy Is Keeping The Impact Of The Second COVID Wave At Bay, Dec. 16, 2020
- Economic Research: The Eurozone Can Still Rebound In 2021 After Lighter Lockdowns, Dec. 1, 2020
- European CLO Performance Index Report Q2 2020, Oct. 8, 2020
- How Credit Distress Due To COVID-19 Could Affect European CLO Ratings, April 2, 2020
- European Leveraged Finance And Recovery Fourth-Quarter Update And Full-Year Summary, Jan. 23, 2020
- Leveraged Finance: A 10-Year Lookback At Actual Recoveries And Recovery Ratings, Feb. 4, 2019
- 2017 EMEA Structured Credit Scenario And Sensitivity Analysis, July 6, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
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'sf' Identifier
The 'sf' identifier is assigned to ratings on structured finance or securitization instruments when required to comply with an applicable law or regulatory requirement or when S&P Global Ratings believes it appropriate. The addition of the 'sf' identifier to a rating does not change that rating's definition or our opinion about the issue's creditworthiness. For detailed information on the instruments assigned the 'sf' identifier, please see the appendix to "S&P Global Ratings Definitions" for the types of instruments that carry the 'sf' identifier. To see if a credit rating has a 'sf' identifier, visit the standardandpoors.com website and search for the rated entity.
| Primary Credit Analyst: | Matteo Breviglieri, London (44) 20-7176-8495; Matteo.Breviglieri@spglobal.com |
| Secondary Contacts: | Matteo Lanza, London + (44)2071766026; matteo.lanza@spglobal.com |
| Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com |
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