Fitch Affirms Madison Arbor Senior Notes at 'AAA'

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings affirms the following notes issued by Madison Arbor Limited (Madison Arbor) at 'AAA':

--Series A, senior notes with a maturity of Dec. 17, 2018.

Madison Arbor is a special purpose trust established by BNP Paribas (BNPP) that purchases participations in collateralized loans made to regulated U.S. and Canadian closed-end funds (CEFs).

KEY RATING DRIVERS

-- High credit quality of underlying loans supported by margin policies including margin haircuts, minimum diversification standards, and asset eligibility criteria.

-- While new loan participations may be added during the first four years (the revolving period), under the Indenture these are subject to a prior review by Fitch (Rating Agency Condition).

-- Short exposure to market value risk at the underlying loan level if a CEF defaults under the terms of each credit agreement. Each underlying loan is secured by assets in a segregated account in which BNPP has a perfected security interest and can liquidate over a short period of time (assumed seven business days maximum) in event of CEF default.

-- Structural protections in the form of over-collateralization (OC) and interest coverage (IC) tests, each set at 105%.

-- Regulatory constraints on CEF leverage by 1940 Investment Act's provisions and/or similar prospectus guidelines which create incentives to keep senior leverage below 33% of total assets.

-- Structural provisions such as transaction wind-down provisions if BNPP is materially downgraded and incentives for borrowers to prepay the loans if BNPP undergoes material credit deterioration.

-- Alignment of interests due to 5% subordination in the form of equity participations that will be held by BNPP.

-- Capabilities of BNPP and Affiliates as Originator of the underlying loans to effectively manage margin policies and perform duties as secured lender.

-- Fitch's Country Ceiling for Ireland is 'AAA'.

ANALYSIS OF MARGIN POLICIES

Fitch reviewed the terms of the credit agreement of each underlying loan and compared the haircuts, minimum diversification, and asset eligibility to the market value risk methodology in Fitch's criteria report 'Rating Closed-End Debt and Preferred Stock'. Each segregated account was also tested for sufficiency of asset coverage at the rating level assigned to the notes using Fitch OC tests.

In addition to loan specific covenants, performance of the participations also benefits from the baseline protections of the 1940s Act (or similar prospectus guidelines) that keep senior borrowings below 33% at the time of issuance and during a normal operating environment. These baseline protections help leverage levels stay low and therefore help keep a significant amount of unencumbered assets available for the fund to post as margin in a market-value stress.

For the common equity asset class, including equity by master limited partnerships (MLPs), Fitch evaluated the margin policies using market-value stresses that reflected the shorter exposure period of the transaction. In this case, Fitch analyzed the shortened exposure period and concluded it would reduce market risk while not increasing liquidity risk substantially. For all fixed income asset classes, Fitch evaluated the margin policies using the discount factors in the CEF Criteria, which assume an exposure period of 45 business days versus the shorter anticipated exposure period of seven days for this transaction.

STRUCTURE

Fitch reviewed the legal structure of the transaction and found it met Fitch's applicable rating criteria. Two key structural elements of the transaction are wind-down triggers based on the rating of BNPP (set at below 'BBB' and 'F2') and IC and OC tests. The IC test compares the interest from the participations minus amounts payable to the interest required to be paid on the notes. The OC test compares the principal balance of the loan participations plus trust deposits to the aggregate amount outstanding on the notes. To pass, both tests need to be greater than 105%. If either test is failing, the trust cannot issue new notes and the trust cannot make equity distributions.

AGENTS

BNPP is the loan originator and servicer. Since 2008 BNPP has provided margin financing to 1940s Act funds. BNPP, through the New York Branch, is servicer of the loan participations. The trustee is US Bank National Association (rated 'AA-/F1+').

PERFORMANCE ANALYTICS

Fitch will monitor the transaction regularly and as warranted by events with a review. Events that may trigger a review include, but are not limited to, the following:

--Any changes to the portfolio of loan participations;

--Downgrade of BNPP to below 'BBB' and 'F2';

--OC or IC test breach;

--Future changes to Fitch's rating criteria.

The indenture requires that prior to any changes to the portfolio of loan participations, the trust must ensure that a change would not result in a change in the rating assigned to the notes.

Surveillance analysis is conducted on the basis of the then-current portfolio of loan participations. Fitch's goal is to ensure that the assigned ratings remain an appropriate reflection of the issued notes' credit risk.

RATING SENSITIVITIES

Fitch performed stress scenarios to assess the transaction's structural protections ability to mitigate market value risk consistent with an 'AAA' rating. Due to the terms of the margin policies, expected unencumbered assets at each fund and equity subordination at the SPV these scenarios had minimal rating impact.

Additionally, ratings assigned to the notes may be sensitive to material changes in the leverage, portfolio credit quality or market risk of the underlying funds. The ratings may also be sensitive to a downgrade of BNPP to below 'BBB' and 'F2', or significant breaches to the OC or IC tests. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.

For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

The sources of information used to assess this rating were the public domain and BNPP.

Opt-in to receive Fitch's forthcoming research on closed-end funds:

http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

--'Rating Closed-End Fund Debt and Preferred Stock' (Sep. 16, 2015);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);

--'Country Ceilings' (Aug. 20, 2015).

Applicable Criteria

Rating Closed-End Fund Debt and Preferred Stock (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871119

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=995638

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995638

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151130006385/en/

Fitch Ratings
Primary Analyst
Ian Rasmussen
Senior Director
+1 212-908-0232
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY, 10004
or
Secondary Analyst
Russ Thomas
Director
+1-312-368-3189
or
Committee Chairperson
Alastair Sewell, CFA
Senior Director
+44 20 3530 1147
or
Media Relations
Hannah James, + 1 646-582-4947
[email protected]

Source: Fitch Ratings

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