Dec 21 - Fitch Ratings has assigned the following ratings to the class A-1A and A-1B notes of Magnetite VII, Limited/Corp (Magnetite VII or the issuer):
—$360,000,000 class A-1A notes ‘AAAsf’; Outlook Stable;
—$12,000,000 class A-1B notes ‘AAAsf’; Outlook Stable.
The ratings are based upon the quality, seniority, and composition of the portfolio of assets along with credit enhancement available to the notes through subordination, the application of excess spread, and other structural protection features. In Fitch’s view, the ratings of the class A-1A and A-1B notes (together, class A-1) are unlikely to be adversely affected by foreseeable levels of defaults.
The class A-1A and A-1B notes perform strongly in Fitch’s cash flow modeling scenarios, as displayed by their resilience in stressed scenarios featuring default levels of up to 71.7% and 69.1%, respectively and with average recoveries as low as 35.3% in an ‘AAAsf’ stress scenario. Fitch’s stressed portfolio and rating sensitivity analysis will be discussed in the new issue report that will be available shortly at ‘www.fitchratings.com’.
Magnetite VII is an arbitrage, cash flow collateralized loan obligation (CLO) that will be managed by BlackRock Financial Management, Inc. (BlackRock). The net proceeds from the note issuance will be invested in an approximately $600 million portfolio of primarily senior secured leveraged loans. The transaction features portfolio concentration limitations and degrees of credit enhancement available to the class A-1 notes that are consistent with recent CLO issuance. At closing, approximately 73.4% of the portfolio has been purchased, with an average credit quality of ‘B’.
Prior to the closing date, an SPV (managed by BlackRock) entered into a warehouse total return swap (“Warehouse TRS”)with Citibank, N.A. The Warehouse TRS references assets that were expected to be eligible for purchase by Magnetite VII. The assets comprising the reference portfolio were purchased by a wholly-owned special purpose subsidiary of Citibank (the “Warehouse Subsidiary”) as a hedge to the TRS. On the closing date, the issuer merged with the Warehouse Subsidiary, with the issuer being the surviving entity of the merger. Terms of the merger transferred all rights and property of the subsidiary to the issuer. Fitch considered the potential for transfer risk in its analysis and requested an opinion that in the event of insolvency of Citibank, the transfer of the Warehouse Subsidiary from Citibank, N.A. to Magnetite VII would not be challenged such that the Warehouse Subsidiary would be recaptured in Citibank’s insolvency estate, but no such opinion was provided. Fitch ultimately determined that the merger-related risk is mitigated by the fact that Citibank sold the subsidiary and did not take any interest in the securities issued by the issuer and the fact that only a portion of the CLO assets were transferred under the merger.
Magnetite VII has a four-year reinvestment period, scheduled to end in January 2017. During the reinvestment period discretionary sales are permitted up to 25% of the portfolio balance per year. Sales of defaulted and credit-risk securities are permitted at any time, including after the reinvestment period, as are sales of credit-improved securities (subject to certain restrictions). The manager also has the ability to reinvest unscheduled principal proceeds and sales proceeds from the disposal of credit risk obligations after the reinvestment period, subject to certain conditions.
The portfolio concentration limitations include a maximum 7.5% allowance for assets rated ‘CCC+’ or below (as defined by S&P) and a 10% total maximum exposure to second lien loans, unsecured loans, and bonds. The transaction’s initial weighted average life covenant of 8.0 years steps down with the passage of time. As with most other recent CLOs rated by Fitch the asset manager has the flexibility to select the required levels of various collateral quality tests, such as the minimum weighted average spread and weighted average recovery rate.
The class A-1A and A-1B notes have been assigned a Stable Outlook due to Fitch’s expectation of steady performance through anticipated levels of default and the various forms of credit enhancement available to the notes.