Fitch Rates Regatta VI Funding Ltd./LLC

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings assigns the following ratings and Rating Outlooks to Regatta VI Funding Ltd./LLC:

--$3,000,000 class X notes 'AAAsf'; Outlook Stable;

--$252,000,000 class A notes 'AAAsf'; Outlook Stable.

Fitch does not rate the class B, C, D, E, S1, S2, P or subordinated notes.

TRANSACTION SUMMARY

Regatta VI Funding Ltd. (the issuer) and Regatta VI Funding LLC (the co-issuer) constitute an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Regatta Loan Management LLC (RLM). Net proceeds from the issuance of the secured notes and subordinated securities will be used to purchase a portfolio of approximately $400 million primarily senior secured leveraged loans. The CLO will have an approximately 4.2-year reinvestment period and a 2.2-year noncall period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 37% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. The degree of CE available to class A notes is in line with the average CE of recent CLO issuances. Class X notes are ultimately expected to be paid in full primarily from the application of interest proceeds via the interest waterfall.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is approximately 'B+/B', which is comparable with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class X and A notes are unlikely to be affected by the foreseeable level of defaults. Class X and A notes are projected to be able to withstand default rates of up to 100% and 60%, respectively.

Strong Recovery Expectations: The indicative portfolio consists of 99.6% first lien senior secured loans. Approximately 95.7% of the indicative portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher and the base case recovery assumption is 81%. In determining the class X and A note ratings, 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 stresses, resulting in a 37.5% recovery rate in Fitch's 'AAAsf' scenario.

Fitch's interest rate stress criteria provides for the application of standard (positive) downwards stresses, instead of negative interest rate stresses, in its analysis of transactions that are not expected to be affected by negative interest rates. Since U.S. CLOs are unlikely to be affected by negative interest rates due to the prevalence of LIBOR floors in the U.S. loan market, Fitch applied the standard (positive) interest rate downwards stress in its analysis of the class X and A notes.

RATING SENSITIVITIES

Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions including decreases in weighted average spread or recovery rates and increases in default rates or correlation. Fitch expects the class X and A notes to remain investment grade even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios were consistently 'AAAsf' for the class X notes and ranged between 'A+sf' and 'AAAsf' for the class A 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, U.S. 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), as well as the issuer's governing documents, 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'. U.S. Bank, N.A. has a long-term and short-term rating that currently meets this expectation. Therefore the rating recommendation for class X and A 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 described in the new issue report, which will be available shortly to investors on Fitch's website at 'fitchratings.com'.

VARIATIONS FROM CRITERIA

Fitch currently addresses operational risk considerations of CLO managers through on-site reviews every two years and updates its assessment as necessary on any organizational changes. The criteria variation from Fitch's Global Rating Criteria for CLOs and Corporate CDOs arises from the fact that the last on-site review was conducted more than two years ago. Fitch continues to deem RLM as an acceptable CLO manager.

DUE DILIGENCE USAGE

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

The publication of a representations, warranties and enforcement mechanisms appendix is not required for this transaction.

Additional information is available at www.fitchratings.com.

Sources of Information:

Sources of information used to assess this rating were provided by the arranger (Morgan Stanley & Co. LLC) 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. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815

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 Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004794

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004794

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/20160519006727/en/

Fitch Ratings
Primary Analyst
Aaron Hughes
Director
+1-312-368-2074
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Trevor Lee
Associate Director
+1-212-908-0881
or
Committee Chairperson
Derek Miller
Managing Director
+1-312-368-2076
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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