Fitch to Rate Guggenheim Private Debt Fund Note Issuer 2.0, LLC

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to assign the following ratings to Guggenheim Private Debt Fund Note Issuer 2.0, LLC (Guggenheim PDFNI 2):

--$149,000,000 class A notes series A-1 'A-sf'; Outlook Stable;

--$50,000,000 class B notes series B-1 'BBB-sf'; Outlook Stable;

--$45,000,000 class C notes series C-1 'BBsf'; Outlook Stable;

--$21,000,000 class D notes series D-1 'Bsf'; Outlook Stable.

The class sizes above are based on $500 million of issuance proceeds expected to be raised at the first funding date. Fitch does not expect to rate the leverage tranche, class E notes and limited liability company interests.

The assignment of the expected ratings is contingent on the receipt of final documents conforming to information already reviewed.

TRANSACTION SUMMARY

Guggenheim PDFNI 2 is a collateralized loan obligation (CLO) transaction that will invest in a portfolio comprised of a combination of broadly syndicated loans and middle market private debt investments (PDIs). The manager, Guggenheim Partners Investment Management, LLC (GPIM) is expecting to raise approximately $2.0 billion of commitments from investors to fund the transaction. Investors will earn class-specific commitment fees on the undrawn portions of their commitments. The commitments will be drawn upon at seven separate funding dates during the investment period. At each funding date, notes and the leverage tranche will be issued in proportions that may decrease the level of credit enhancement (CE) available for each class. Assuming the leverage tranche and each class of notes is fully drawn on each funding date, credit enhancement can decrease from funding date one to funding date seven as follows:

--Class A notes: 52.2% at funding date one; 42.5% at funding date seven;

--Class B notes: 42.2% at funding date one; 32.0% at funding date seven;

--Class C notes: 33.2% at funding date one; 24.9% at funding date seven;

--Class D notes: 29.0% at funding date one; 21.2% at funding date seven.

Fitch expects to assess the creditworthiness of the notes at each of the seven funding dates.

The manager may reinvest proceeds during the transaction's four-year investment period. Fitch's Funds and Asset Managers group has conducted an operational review on GPIM and views GPIM as an acceptable manager for the transaction.

RATING RATIONALE

Fitch's analysis focuses primarily on a Fitch-stressed portfolio, which accounts for many of the worst-case portfolio concentrations permitted by the indenture. Guggenheim PDFNI 2 was stressed to reflect the potential for a lower obligor count, higher 'CCC' asset exposure and broader permitted investments when compared to a typical broadly syndicated CLO. Cash flow modeling of the Fitch-stressed portfolio indicates performance in-line with the assigned ratings for each class of rated notes in Fitch's standard cash flow scenarios.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) for each class of rated notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in each class's respective rating stress scenario. The degree of CE available to each class of rated notes exceeds the average CE levels typically seen on like-rated tranches of recent CLO issuances backed by middle market loans.

'B-/CCC+' Asset Quality: The average credit quality of the Fitch stressed portfolio is 'B-/CCC+', which is below that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality while issuers in the 'CCC' rating category denote substantial credit risk. When analyzing the capital structure for the first funding date, class A, B, C and D notes are projected to be able to withstand default rates of up to 90.5%, 82.9%, 78.3% and 76.1%, respectively.

Strong Recovery Expectations: In determining the rating of the 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 Fitch stressed portfolio assumed 100% of the assets were assigned a Fitch recovery rating of 'RR3', resulting in a base case recovery assumption of 54.5%. The analysis of the class A and B notes assumed recovery rates of 33.8% in Fitch's 'A-sf' scenario and 41.4% in Fitch's 'BBB-sf' scenario, respectively. Class C and D notes assumed recovery rates of 49.7% in Fitch's 'BBsf' scenario and 54.5% in Fitch's 'Bsf' scenario, respectively.

FITCH ANALYSIS

Analysis was conducted on a Fitch-stressed portfolio, which was created by Fitch and designed to address the impact of the most prominent risk-presenting concentration allowances and targeted test levels to ensure that the transaction's expected performance is in line with the ratings assigned.

The Fitch-stressed portfolio at the first funding date was assumed to consist of $500 million par amount of loans. Notable portfolio concentrations specified by the transaction documents include:

--Maximum 20% assets rated 'CCC+' and below (by Fitch);

--Maximum 60% assets rated 'B-' and below (by Fitch);

--Minimum average recovery rates of 40%, 50%, 60% and 65% for the class A, class B, class C and class D notes, respectively;

--Maximum weighted average life (WAL) test of 7.5 years;

--Maximum 10% fixed-rate obligations;

--Minimum weighted average spread test of 6.25% and weighted average coupon test of 8%.

Individual obligor concentration is limited to 1% of the portfolio, with the exception of the largest nine exposures. If the sum of the largest nine exposures is less than 70%, the indenture permits additional obligors to be as large as 5%. The indenture also sets minimum exposures to syndicated bank loans, which decreases from 25% to 15% as the portfolio size increases.

Given these parameters, Fitch stressed the portfolio to consist of 39 obligors. The degree of permitted obligor concentration is greater than what Fitch has seen in recent CLO issuance, and has been incorporated into Fitch's stressed portfolio analysis.

The indenture allows for a 20% 'CCC'-rated bucket for funding dates one through six, increasing to 25% for the seventh funding date. Additionally, collateral rated 'B-'or lower is limited to 60% for funding dates one through six, increasing to 65% for the seventh funding date. Increased 'CCC' and 'B-' limitations are subject to both the commitments and the leverage tranche commitments being fully drawn, or the rating condition being satisfied with respect to such increases.

The maximum WAL test begins at 7.5 years for the first funding date and steps down in half-year increments at each subsequent funding date until the fifth funding date, but the maximum WAL for funding dates six and seven remains at 5.5 years. In consideration of the longer risk horizon for funding dates one through five, the Fitch stressed portfolio assumed the WAL test begins at 8.5 years, stepping down to 5.5 years at the seventh funding date. The transaction's other portfolio covenants, such as specified industry concentration limitations, are static at each funding date. Fitch maximized the permitted industry concentrations and assumed the investments are within industries considered by Fitch to be relatively highly-correlated, thereby increasing the overall level of correlation in the hypothetical portfolio. Finally, all assets were assumed to have a Fitch recovery rating of 'RR3', commensurate with the minimum average recovery rate test limits specified by the indenture.

Projected default and recovery statistics of the Fitch-stressed portfolio were generated using Fitch's portfolio credit model (PCM). The PCM default rate hurdles for the first funding date were 77%, 70%, 62%, and 53% at the 'A-sf', 'BBB-sf', 'BBsf', and 'Bsf' rating levels, respectively. These PCM outputs were used as inputs into Fitch's proprietary cash flow model, which was customized to reflect Guggenheim PDFNI 2.0's specific transaction structure. In the analysis of the Fitch-stressed portfolio, the cash flow model was also adjusted to account for possible risk-presenting allowances such as the maximum permitted amounts of fixed-rate assets and semi-annual-pay assets (10% each). The fixed-rate collateral assets were assumed to pay the minimum weighted average coupon of 8%, while the floating-rate assets were assumed to pay the minimum floating spread over LIBOR of 6.25%.

Fitch's cash flow model runs include 12 stress scenarios encompassing different combinations of default timing and interest rate stresses, as described in Fitch's cash flow analysis criteria. The break-even default rates (BDRs) for each class of notes in each scenario were compared to the PCM default hurdle rates at the appropriate rating stresses. The cash flow analysis of the Fitch-stressed portfolio demonstrated that each class of rated notes passed all 12 stress scenarios for the first funding date at levels consistent with the ratings assigned above, with minimum breakeven cushions (BDR minus PCM hurdle rate) of 13.5%, 12.9%, 16.3%, and 23.1% for the class A, B, C and D notes, respectively.

Fitch also analyzed the PCM and cash flow model output using the Fitch-stressed portfolio for each of the remaining six funding dates, assuming the structure increased its leverage at each funding date by applying the maximum draw amounts for each class of notes, including the leverage tranche. The analysis of funding dates two through seven demonstrated that each class of rated notes also passed all 12 stress scenarios at levels consistent with the ratings assigned above, with one exception. Funding date seven had one marginal failure of (0.5%), with minimum breakeven cushions of 1.2%, (0.5%), 4.0% and 9.1% for the class A, B, C and D notes, respectively.

RATING SENSITIVITIES

Fitch evaluated the first funding date 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 each class of notes to remain within one rating category of their original ratings even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'AA+sf' and 'BBB+sf' for the class A notes, 'BBB+sf' and 'BB+sf' for the class B notes, 'BBBsf' and 'B+sf' for the class C notes and 'BB+sf' and 'B-sf' for the class D notes. Fitch also analyzed the impact of a reduced WAL and whether a related decrease of aggregate available excess spread over the lifetime of the transaction would negatively impact the expected performance of the notes; the results of this scenario remained consistent with the assigned ratings. The results of the sensitivity analysis also contributed to Fitch's assignment of Stable Outlooks on each class of notes.

PERFORMANCE ANALYTICS

Fitch expects to have credit views, via either public ratings or credit opinions, on all of the PDIs that will be purchased into the portfolio. Fitch will rely on the issuer to provide it with relevant financial information on such borrowers on an ongoing basis so that Fitch may maintain its ratings on the transaction.

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:

--Asset defaults;

--Portfolio migration;

--OC or IC test breach;

--Breach of concentration limitations or portfolio quality covenants;

--Future changes to Fitch's rating criteria.

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

An assessment of the transaction's representations and warranties was also completed and found to be consistent with the ratings assigned. For further information, see 'Guggenheim Private Debt Fund Note Issuer 2.0, LLC Representations and Warranties Appendix', dated May 20, 2015.

Details of the transaction's performance are available to subscribers on Fitch's web site at 'www.fitchratings.com'.

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

The expected ratings are based on information provided to Fitch as of May 20, 2015. Sources of information used to assess these ratings were provided by the manager (GPIM), and the public domain.

Applicable Criteria & Related Research:

--'Global Structured Finance Rating Criteria' (March 31, 2015);

--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);

--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (Dec. 19, 2014);

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

Applicable Criteria and Related Research: Guggenheim Private Debt Fund Note Issuer 2.0 Appendix

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866336

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268

Global Rating Criteria for Corporate CDOs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds

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

Counterparty Criteria for Structured Finance and Covered Bonds

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985105

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/20150521005763/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
Cristina Feracota
Associate Director
+1-312-608-2300
Committee Chairperson
or
Derek Miller
Senior 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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