St. Paul's CLO II DAC class F outlook cut to negative as portfolio quality weakens

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St. Paul's CLO II outlook cut

Highlights

Fitch cut the outlook on St. Paul's CLO II DAC class F notes to negative as 'CCC+' and below assets rose to 12.6%, exceeding the 7.5% limit.
Despite par gains improving to 0.1% below par, 23.9% of the portfolio is now on Negative Outlook, highlighting future default absorption risks.
Class B, C, D, and E notes remain rated below model-implied outputs due to insufficient break-even default rates and credit enhancement under current portfolio conditions.

Portfolio deterioration drives outlook change

As reported by Fitch Ratings, the outlook revision reflects weaker portfolio quality in the securitisation, which is backed mainly by senior secured obligations and is actively managed by ICG Manager Limited. The agency says assets rated 'CCC+' and below, excluding non-rated assets, account for 12.6% of the portfolio, above the portfolio profile test limit of 7.5% and up from 7.9% at the previous review in November 2025.

Fitch says 23.9% of the current portfolio is now on Negative Outlook, while around 0.6% of assets mature beyond the transaction's final maturity date. Although the deal has recorded par gains since the last review, improving to 0.1% below par from 0.8% below par through portfolio trading, the agency says the recent deterioration could weaken the class F notes' capacity to absorb future defaults.

Fitch assesses the average credit quality of the underlying obligors at 'B'/'B-', with a weighted average rating factor of 27.3 under its latest criteria. It also says senior secured obligations make up 96.8% of the portfolio, supporting a Fitch-calculated weighted average recovery rate of 64.3%.

Reinvestment period and rating constraints remain in focus

The agency says the transaction remains within its reinvestment period until November 2026, meaning its upgrade analysis is based on a stressed portfolio, while downgrade analysis uses the current portfolio. After the reinvestment period ends, the documentation requires the transaction to meet the 7.5% limit on 'CCC+' and below assets to continue reinvestment.

Fitch describes the portfolio as diversified across obligors, countries and industries. The top 10 obligors represent 17% of the portfolio, no single obligor exceeds 2.3%, and exposure to the three largest Fitch-defined industries stands at 33.1%; fixed-rate assets are 9.4%, within the 15% limit.

The agency says the class B and class C notes are rated one notch below their model-implied ratings, while class D and class E are rated two notches below, because break-even default rates and credit enhancement do not sufficiently support those higher model outputs under current conditions. Fitch adds that further downgrades may occur if defaults and portfolio deterioration exceed its assumptions, while upgrades would depend on stable credit quality and deleveraging that increases enhancement and excess spread.

In our earlier coverage of Hainan Rubber’s proposed subordinated perpetual securities via Halcyon Agri, we explained Fitch’s BBB- rating rationale, focusing on the notes’ junior ranking in the capital structure and the issuer’s ability to defer coupons. We also outlined Fitch’s view of the group’s leverage and liquidity profile, and how expected state support and funding access influence the overall credit assessment.

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