Feb 5 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Harvest CLO IV Plc.'s notes, as follows:
EUR402.3m Class A-1A (ISIN XS0254041493): affirmed at 'AAAsf'; Outlook Stable
EUR74.0m Class A-1B (ISIN XS0254042541): affirmed at 'AAsf'; Outlook revised to Positive from Stable
EUR44.9m Class A-2 (ISIN XS0254042970): affirmed at 'AAsf'; Outlook revised to Positive from Stable
EUR54.6m Class B-1 (ISIN XS0254043861): affirmed at 'Asf'; Outlook Stable
EUR4.4m Class B-2 (ISIN XS0254046963): affirmed at 'Asf'; Outlook Stable
EUR29.0m Class C (ISIN XS0254048746): affirmed at 'BBBsf'; Outlook Stable
EUR11.1m Class D-1 (ISIN XS0254050213): affirmed at 'BBsf'; Outlook Stable
EUR8.9m Class D-2 (ISIN XS0254052771): affirmed at 'BBsf'; Outlook Stable
EUR15.4m Class E-1 (ISIN XS0254054553): affirmed at 'Bsf'; Outlook revised to Stable from Negative
EUR1.6m Class E-2 (ISIN XS0254055360): affirmed at 'Bsf'; Outlook revised to Stable from Negative
Harvest CLO IV Plc. is a securitisation of senior secured loans managed by 3i Debt Management Investments Ltd, which closed in 2006. The final legal maturity is July 2021.
KEY RATING DRIVERS
The affirmation reflects both the sufficient credit enhancement and the material excess spread that would support all notes in a high default environment. The revision of the Outlooks on the class A-1B and A-2 notes recognises the potential benefit of excess spread and the likely increase in credit enhancement over the next 18-24 months. This is due to the transaction deleveraging following the end of the reinvestment period (in July 2013) and the manager's current inability to reinvest unscheduled principal proceeds or proceeds from the sale of credit improved obligations due to the breach of a collateral quality test and a portfolio profile test. The revision of the Outlooks on the class E-1 and E-2 notes is due to the material reduction in exposure to short-term refinancing risk.
Since the last review in February 2013, the underlying portfolio has improved slightly with the Fitch weighted average rating factor falling to 32.99 from 33.24 per the current Fitch rating factor weights. This was due to decreased exposure to 'CCC' rated and below assets (3.9% from 4.1% in December 2012) and minor positive rating migration of 'B-' rated assets. In the same period, the weighted average spread increased to 4.1% from 3.77%.
The weighted average life of the portfolio has increased to 4.75 years from 4.2 years since the last review due to the shift in the portfolio's maturity profile. The exposure to assets maturing between 2014-2015 has declined by 79% year on year (to 4.8% of the outstanding portfolio), substantially reducing the short-term exposure to refinance risk, while the proportion of the portfolio maturing after 2017 increased to 67.86% from 31.10%.
The over-collateralisation (OC) tests are all passing and have remained steady during the past year. The headroom on the most junior OC test is currently 1.0%, which is considered indicative of efficient OC covenants. The transaction's interest diversion test breached during 2013, which diverted a portion of excess spread to purchasing new collateral. This test is not effective post the reinvestment period. There has been one new default in the portfolio since the last review and current defaults represent 2.3% of the outstanding portfolio balance.
Fitch ran various rating sensitivity scenarios on the transaction to assess the impact on the notes' ratings if the key risk drivers - default rates and recovery rates - were stressed. Increasing the default probability of all the assets in the portfolio by 25% would likely result in a downgrade of the notes of between zero and two notches while applying a recovery rate haircut of 25% on all the assets would likely result in a downgrade of the notes of between zero and two notches.