Fitch Rates Canyon CLO 2016-1, Ltd./LLC

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following ratings to Canyon CLO 2016-1, Ltd./LLC:

-- $247,500,000 class A-1 notes 'AAAsf'; Outlook Stable;

-- $45,000,000 class A-2 notes 'AAAsf'; Outlook Stable;

-- $42,250,000 class B-1 notes 'AAsf'; Outlook Stable;

-- $5,000,000 class B-2 notes 'AAsf'; Outlook Stable.

Fitch does not rate the class C, D-1, D-2, E or subordinated notes.

TRANSACTION SUMMARY

Canyon CLO 2016-1, Ltd. (the issuer) and Canyon CLO 2016-1, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Canyon CLO Advisors LLC. Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $450 million of primarily senior secured leveraged loans. The CLO will have an approximately four-year reinvestment period and a two-year non-call period.

KEY RATING DRIVERS

Sufficient Credit Enhancement (CE): CE of 45% for class A-1 and 35% for class A-2 notes (together, class A) and 24.5% for class B-1 and B-2 notes (together, class B), in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' and 'AAsf' stress scenarios, respectively. Compared to CE levels of recent CLO issuances for notes in the same respective rating categories, the degree of CE available is above average for class A-1, below average for class A-2, and in line with the average for class B. Cash flow modeling results for the three classes indicate performance in line with other Fitch-rated CLO notes at their respective ratings.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A and B notes are unlikely to be affected by the foreseeable level of defaults. Class A-1, A-2 and B notes are robust against respective default rates of up to 66.3%, 59.5% and 55%.

Strong Recovery Expectations: The indicative portfolio consists of 96.8% first lien senior secured loans. Approximately 89.8% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, and the base case recovery assumption is 77.4%. In determining the class A and B note ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions of higher rating stress assumptions, resulting in a 39.2% and 47.4% recovery rate assumption in Fitch's 'AAAsf' and 'AAsf' scenarios, respectively.

RATING SENSITIVITIES

Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions, including decreases in recovery rates and increases in default rates or correlation. Fitch expects class A and B notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AA-sf' and 'AAAsf' for class A-1 notes, 'A+sf' and 'AAAsf' for class A-2 notes and 'BBB-sf' and AA+sf' for class B-1 and B-2 notes.

Fitch published an exposure draft of its Counterparty Criteria for Structured Finance and Covered Bonds on April 14, 2016. The exposure draft serves as the operative criteria report for this ratings analysis. Under the exposure draft, as well as the issuer's governing documents, a direct support counterparty is expected to maintain a long-term Fitch rating of at least 'A' or a short-term Fitch rating of at least 'F1' in order to support note ratings of up to 'AAAsf'. The issuer's account-holder, Deutsche Bank Trust Company Americas (DBTCA, rated 'A-/F1'/Stable Outlook), satisfies the minimum expected ratings threshold for a direct support counterparty under the exposure draft framework.

Fitch's existing counterparty criteria (dated May 14, 2014) expects that a direct counterparty role be fulfilled by an institution with a long-term Fitch rating of at least 'A' and a short-term Fitch rating of at least 'F1' to support note ratings of up to 'AAAsf'. DBTCA's long-term rating does not meet this expectation. To support note ratings in the 'AAsf' rating category, Fitch's existing counterparty criteria expects this role be fulfilled by an institution with a long-term Fitch rating of at least 'A-' and a short-term Fitch rating of at least 'F2'. Barring further mitigating factors, if the proposed counterparty criteria is not adopted and the existing counterparty criteria is maintained, we would expect the ratings on the class A-1 and A-2 notes to be in the 'AAsf' rating category and ratings on the class B-1 and B-2 notes to remain 'AAsf'.

The framework regarding expectations for qualified investments has not materially changed between the existing criteria and the exposure draft.

Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report, which will soon be available to investor's on Fitch's website at 'fitchratings.com'.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

Sources of Information:

Sources of information used to assess these ratings were provided by the arranger (Goldman, Sachs & Co.) and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878412

Global Rating Criteria for CLOs and Corporate CDOs (pub. 12 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873664

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Related Research

Canyon CLO 2016-1, Ltd./LLC -- Appendix

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879702

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004041

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004041

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160505006289/en/

Fitch Ratings
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Erika Tsang, CFA
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or
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or
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Source: Fitch Ratings

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