Fitch Rates KKR Financial CLO 2013-2 Ltd./LLC Refinancing Notes

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned ratings to the class A-1A-R, A-1B-R, and A-2B-R refinancing notes issued by KKR Financial CLO 2013-2 Ltd./LLC (KKR 2013-2). A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch has been notified of a proposed Supplemental Indenture that would cause a refinancing of the outstanding notes and amend certain terms and definitions of the indenture.

On July 25, 2016, KKR 2013-2 will issue refinancing notes as class A-1A-R notes, class A-1B-R notes and class A-2B-R notes, and apply the net issuance and sales proceeds thereof to redeem the existing class A-1A, A-1B, A-1C and A-2B notes at par (plus accrued interest).

Classes A-1A and A-1C will collapse into the new class A-1A-R notes, totalling $215 million, with a stated coupon of three month LIBOR +145 basis points (bps). The spread on the class A-1C notes stepped up to 175 bps from 110 bps on the July 2015 payment date and was scheduled to step up again to 200 bps on the July 2016 payment date. The other classes of refinancing notes will be issued in the same amounts and have the same terms as the corresponding classes of original notes, except the spreads or coupon on all refinancing notes will be reduced.

The overall reduction in costs on the liabilities is viewed as a credit positive for the transaction. The collateral portfolio continues to display stable performance since the last review on December 18, 2015 and credit enhancement levels will remain the same on the refinancing notes. The portfolio's credit quality remain relatively unchanged at 'B/B-' since the last review in December 2015, based on Fitch's Issuer Default Rating (IDR) Equivalency Map. Fitch currently considers 5.6% of the collateral assets to be rated in the 'CCC' category as compared to 3.6% in the last review. Approximately 92.3% of the portfolio has strong recovery prospects or a Fitch assigned Recovery Rating of 'RR2' or higher. The transaction continues to pass all of its coverage tests with ample cushion and all of its concentration limitation and collateral quality tests. The current WAS is reported to be 4.3% from 4.6% at last review, versus a trigger of 3.7%. There are currently 158 obligors, compared to 145 obligors at last review, and there no reported defaults in the portfolio. Consequently, no cash flow model analysis was conducted for this review and Fitch has determined that the rating on the refinancing notes shall be assigned at the same rating level as the original notes.

RATING SENSITIVITIES

The ratings of the notes may be sensitive to the following: asset defaults, portfolio migration, including assets being downgraded to 'CCC', portions of the portfolio being placed on Rating Watch Negative, overcollateralization (OC) or interest coverage (IC) test breaches, or breach of concentration limitations or portfolio quality covenants. Fitch conducted rating sensitivity analysis on the closing date of KKR 2013-2, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.

Initial Key Rating Drivers and Rating Sensitivity are further described in the New Issue Report published on Jan. 23, 2014. In conjunction with the refinancing, certain provisions of the indenture have been amended by the Supplemental Indenture. The amendment addresses Volcker Rule concerns and will no longer allow for the investment of non-loan assets such as senior secured notes and bonds in the collateral portfolio. Fitch believes that the changed provisions from the Supplemental Indenture, including the ones noted above, will have no impact on the rating of the refinancing notes.

DUE DILIGENCE USAGE

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

The following classes will be PIF on the refinancing date:

--$100,000,000 class A-1A notes, PIF;

--$10,000,000 class A-1B notes, PIF;

--$115,000,000 class A-1C notes PIF.

Fitch has assigned the following ratings:

--$215,000,000 class A-1A-R notes, 'AAAsf'; Outlook Stable;

--$10,000,000 class A-1B-R notes, 'AAAsf'; Outlook Stable;

--$10,000,000 class A-2B-R notes NR.

Fitch does not rate the class A-2A, A-2B, A-2B-R B, C, D, or the subordinated notes.

Additional information is available at www.fitchratings.com.

Sources of Information:

The information used to assess these ratings was sourced from periodic trustee reports, note valuation reports, and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963

Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Jun 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882840

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009448

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009448

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/20160725006247/en/

Fitch Ratings
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Timothy Chan
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Fitch Ratings, Inc.
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New York, NY 10004
or
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or
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Source: Fitch Ratings

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