RPT-Correct: Fitch Assigns Arbour CLO Limited Expected Ratings

Mon May 19, 2014 5:53am EDT

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May 19 (Reuters) - (The following statement was released by the rating agency)

This announcement corrects the version published earlier today, which incorrectly stated the class B-1, B-2, C-1 and C2 notes' amounts.

Fitch Ratings has assigned Arbour CLO Limited notes expected ratings, as follows:

EUR208.75m class A: 'AAA(EXP)sf'; Outlook Stable

EUR26.25class B-1: 'AA(EXP)sf'; Outlook Stable

EUR19.95m class B-2: 'AA(EXP)sf'; Outlook Stable

EUR11.25m class C-1: 'A+(EXP)sf'; Outlook Stable

EUR10.75m class C-2: 'A+(EXP)sf'; Outlook Stable

EUR19.75m class D: 'BBB+(EXP)sf'; Outlook Stable

EUR26.675m class E: 'BB+(EXP)sf'; Outlook Stable

EUR12.125m class F: 'B-(EXP)sf'; Outlook Stable

EUR39.5m subordinated notes: not rated

The assignment of final ratings is contingent on the receipt of final documents conforming to information already reviewed.

Arbour CLO Limited is an arbitrage cash flow collateralised loan obligation (CLO).

KEY RATING DRIVERS

Average Portfolio Credit Quality

Fitch expects the average credit quality of obligors to be in the 'B' category. The agency has public ratings or credit opinions on all 59 obligors in the initial portfolio. The covenanted maximum Fitch weighted average rating factor (WARF) for assigning the expected ratings is 34.0. The WARF of the initial portfolio is 31.7.

High Expected Recoveries

The portfolio will comprise a minimum of 90% senior secured obligations. Recovery prospects for these assets are typically more favourable than for second-lien, unsecured and mezzanine assets. Fitch has assigned Recovery Ratings (RR) to all obligations in the initial portfolio. The covenanted minimum weighted average recovery rate (WARR) for assigning the expected ratings is 69%. The WARR of the initial portfolio is 74.8%.

Payment Frequency Switch

The notes pay quarterly while the portfolio assets can reset to a semi-annual basis. The transaction has an interest-smoothing account, but no liquidity facility. Liquidity stress for the non-deferrable class A, B-1 and B-2 notes, stemming from a large proportion of assets resetting to a semi-annual basis in any one quarterly period, is addressed by switching the payment frequency on the notes to semi-annual in this scenario.

Partial Interest Rate Risk

Between 5% and 15% of the portfolio can be invested in fixed rate assets, while fixed rate liabilities account for 10% of the target par amount.

Limited FX Risk

The transaction is allowed to invest up to 50% of the portfolio in non-euro-denominated assets, provided they are hedged with perfect asset swaps within six months of their purchase. Unhedged non-euro assets cannot exceed 2.5% of the portfolio at any time.

Trading Gain Release

The portfolio manager may designate trading gains as interest proceeds, providing the portfolio balance remains above the reinvestment target par balance and the class E overcollateralisation (OC) test remains above its value at the effective date.

TRANSACTION SUMMARY

Net proceeds from the note issue will be used to purchase a EUR365m portfolio of mostly European leveraged loans and bonds. The portfolio will be managed by Oaktree Capital Management (UK) LLP. The transaction will have a four year re-investment period scheduled to end in 2018.

The transaction documents may be amended subject to rating agency confirmation or noteholder approval. Where rating agency confirmation relates to risk factors, Fitch will analyse the proposed change and may provide a rating action commentary if the change has a negative impact on the ratings. Such amendments may delay the repayment of the notes as long as Fitch's analysis confirms the expected repayment of principal at the legal final maturity.

If in the agency's opinion the amendment is risk-neutral from a rating perspective Fitch may decline to comment. Noteholders should be aware that confirmation is considered to be given if Fitch declines to comment.

RATING SENSITIVITIES

A 25% increase in the expected obligor default probability would lead to a downgrade of one to three notches for the rated notes.

A 25% reduction in expected recovery rates would lead to a downgrade of one to six notches for the rated notes.

Key Rating Drivers and Rating Sensitivities are further described in the accompanying pre-sale report, which will shortly be available at www.fitchratings.com.

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