RR 49 LTD reset CLO wins Fitch ratings for refinancing transaction

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RR 49 CLO Fitch refinancing

Highlights

Fitch Ratings assigned ratings and Outlooks to the RR 49 LTD reset CLO, refinancing outstanding notes and financing the portfolio using new secured and subordinated notes.
The indicative portfolio's average credit quality is 'B', with a weighted average rating factor of 23.83 and a weighted average recovery rate of 73.46%, managed to specific covenants.
Fitch's stress tests found the rated notes withstand default and recovery assumptions for their ratings, with possible downgrades from weaker recoveries or higher defaults, and upgrades possible for some non-AAA classes.

Transaction structure and portfolio profile

As reported by Fitch Ratings, the agency has assigned ratings and Rating Outlooks to the RR 49 LTD reset transaction, an arbitrage cash flow CLO originally closed in April 2021. Net proceeds from the new secured notes, together with existing subordinated notes, are being used to redeem the outstanding notes and finance the loan portfolio.

The indicative portfolio has an average credit quality of 'B', which Fitch says is in line with recent CLOs. Its weighted average rating factor is 23.83 and will be managed to a WARF covenant from a Fitch test matrix, while the portfolio is composed entirely of first-lien senior secured loans.

Fitch says the weighted average recovery rate of the indicative portfolio is 73.46% and will be managed to a WARR covenant from a Fitch test matrix. The three largest industries may account for as much as 44.5% of the portfolio in aggregate, while the top five obligors may represent up to 12.5% at the initial example matrix point.

Stress analysis and rating risks

To evaluate the deal, Fitch used a customized proprietary cash flow model to replicate principal and interest waterfalls and test the effectiveness of structural features in the transaction. Under the agency's stress scenarios, the rated notes can withstand default and recovery assumptions consistent with their assigned ratings.

The weighted average life for the transaction stress portfolio is reduced by up to 12 months for WAL covenants above six years, reflecting structural and reinvestment conditions after the reinvestment period. Fitch adds that weaker recovery rates or higher default rates could lead to downgrades, while stronger recoveries or lower defaults could support upgrades for notes that are not already in the highest rating category, including the class A-1B-R notes rated 'AAAsf', for which upgrade scenarios are not applicable.

In our earlier coverage of Hainan Rubber’s proposed subordinated perpetual sustainable securities via its majority-owned unit Halcyon Agri, we explained why Fitch rated the notes below the issuer level due to their junior ranking and coupon deferral features. We also outlined Fitch’s view of the group’s leverage and liquidity profile, including the role of state support and funding access in underpinning the company’s credit stance.

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