Fitch Rates Mill Creek CLO II, Ltd./LLC

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings and Rating Outlooks to Mill Creek CLO II, Ltd./LLC:

--$196,500,000 class A notes 'AAAsf', Outlook Stable;

--$25,500,000 class B notes 'AAsf', Outlook Stable;

--$15,600,000 class C notes 'Asf', Outlook Stable;

--$18,000,000 class D notes 'BBB-sf', Outlook Stable.

Fitch does not rate the class E or subordinated notes.

TRANSACTION SUMMARY

Mill Creek CLO II, Ltd. (the issuer) and Mill Creek CLO II, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by CreekSource LLC (CreekSource). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $300 million of primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period and two-year noncall period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) available to the notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the respective rating stress scenarios. The degree of CE available to the class A notes is lower than the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other 'AAAsf' rated CLO notes. The degree of CE available for the class B, C, and D notes is above average for notes in the same respective rating categories in recent CLO issuances.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is in line with that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, each class of rated notes is projected to be sufficiently robust against default rates in line with its applicable rating stress.

Strong Recovery Expectations: The indicative portfolio consists of 100.0% first lien senior secured loans. Approximately 95.8% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, with 33.7% consisting of assets with a Fitch-assigned recovery rating of 'RR1'; the base case recovery assumption is 81.7%. In determining the ratings for each class of notes, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stress assumptions. The recovery rates for the class A, B, C, and D notes used in the analysis of Mill Creek CLO II are 42.2%, 51.0%, 55.8%, and 62.3%, respectively. These stress recovery levels are higher than the average recovery assumptions for recent CLOs, which is primarily driven by the large proportion of assets with a Fitch-assigned recovery of 'RR1', as noted above.

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 the class A and B notes to remain investment grade, while the class C notes are expected to remain within two rating categories of their assigned rating and the class D notes are expected to remain within three rating categories of their assigned rating, even under the most extreme sensitivity scenarios.

Results under these sensitivity scenarios ranged between 'Asf' and 'AAAsf' for the class A notes, between 'BBB-sf' and 'AAAsf' for the class B notes, between 'BB-sf' and 'A+sf' for the class C notes, and between 'CCCsf' and 'A-sf' for the class D 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, a direct support counterparty is expected to maintain a long-term rating of at least 'A' or a short-term rating of at least 'F1' in order to support note ratings of up to 'AAAsf'. The issuer's account holder, Wells Fargo Bank N.A., 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 this role to be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1'. Wells Fargo's long-term rating currently meets this expectation, but the indenture provisions give the optionality of either a long- or short-term rating. Fitch notes that Wells Fargo's short-term rating of 'F1' is in line with the expectation for short-term ratings under Fitch's existing counterparty criteria, and that the role of issuer account holder poses inherently short-term risk to the CLO. Therefore, the rating recommendation for each class of notes remains achievable under Fitch's existing criteria.

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 detailed in the new issue report, which will be available shortly to investors at 'www.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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002990

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002990

Endorsement Policyhttps://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/20160421006584/en/

Fitch Ratings
Primary Analyst:
Cristina Jennings, +1-312-606-2300
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Aaron Hughes, +1-312-368-2074
Director
or
Committee Chairperson:
Robert Rhein, +1-312-606-2314
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
[email protected]

Source: Fitch Ratings

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