Fitch Ratings has affirmed five classes of notes issued by Hamlet II, Ltd./LLC (Hamlet II) as follows:
--$137,900,000 class A-1 notes at 'AAAsf'; Outlook Stable;
--$210,000,000 class A-2a notes at 'AAAsf'; Outlook Stable;
--$37,100,000 class A-2b notes at 'AAAsf'; Outlook Stable;
--$30,000,000 class B notes at 'AAsf'; Outlook Stable;
--$85,000,000 subordinated notes at 'BBBsf'; Outlook to Positive from Stable.
KEY RATING DRIVERS
The rating affirmations are based on stable performance of the portfolio combined with steadily increasing degrees of credit enhancement available to the rated notes. Credit enhancement levels continue to increase as a result of a structural feature that diverts excess interest proceeds to purchase additional collateral rather than paying the subordinated notes during the reinvestment period. Fitch calculates that approximately $101.5 million of interest proceeds that would have otherwise been paid to the subordinated notes has been reinvested since the close of the transaction. Since Fitch's last rating action in February 2013, $16.9 million of such proceeds have been diverted; this figure excludes the February 2014 payment date, for which Fitch has not yet received reporting. Total collateral par plus principal cash has increased to approximately $597.6 million as of the Jan. 6, 2014 trustee report from an initial target par amount of $495 million at closing.
As of the Jan. 6, 2014 trustee report, exposure to 'CCC' rated collateral as reported by the trustee is approximately 2.2%, and there are two defaulted assets in the portfolio. In Fitch's opinion, the average credit quality of the portfolio remains at 'B+/B', which is in line with Fitch's last review. The overcollateralization (OC) ratio currently stands at 154.8% compared to a value of 129.1% at the effective date and a 120.6% trigger. The interest coverage (IC) test is significantly in compliance with a calculated 1444% ratio versus a 115% trigger. All concentration limitations and collateral quality tests are in compliance with the permissible limitations.
Actions were taken in November 2012 to extend the transaction's reinvestment period by one year. The reinvestment period will now end in November 2014 as opposed to the original end date in November 2013. As a result of the extension, the weighted average life (WAL) trigger was extended by one year and currently stands at 5.25 years. Continued reinvestment has led the current portfolio to have a WAL of 5.15 years which is similar to the WAL at Fitch's last review.
The ratings of the notes may be sensitive to the following: asset defaults, portfolio migration, including assets being downgraded to 'CCC', portions of the portfolio being placed on Rating Watch Negative, OC or IC test breaches, or breach of concentration limitations or portfolio quality covenants. Fitch analyzed a sensitivity scenario in addition to its analysis of the current characteristics of the collateral portfolio as part of this review. Fitch's sensitivity scenario included increased levels of defaults and reduced asset spread of the portfolio.
Fitch's analysis of the current portfolio, in addition to the sensitivity scenario, showed that the credit enhancement provided to each class of notes is sufficient to support the current rating levels. The Outlook on the subordinated notes has been revised to Positive from Stable, indicating that future upgrades to the notes are possible. The class A-1, class A-2a, class A-2b and class B notes have also benefited from the increased credit enhancement levels and are not expected to experience rating volatility in the near term, which supports Fitch's Stable Outlook on these notes.
This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery rates for the underlying portfolio. The PCM outputs were used as inputs into Fitch's proprietary cash flow model, which was customized to reflect Hamlet II's specific transaction structure.
Hamlet II is a cash flow collateralized loan obligation (CLO) that closed on Nov. 21, 2006 and is managed by Octagon Credit Investors, LLC. The reinvestment period is scheduled to end in November 2014, and the stated maturity of the transaction is in May 2021. The portfolio currently consists of 88.7% senior secured loans with the remainder consisting of high-yield bonds (4.6%), second lien loans (3.1%), structured finance assets (3%) and senior unsecured loans (0.6%).
Additional information is available at www.fitchratings.com.
The information used to assess these ratings was sourced from periodic servicer reports, note valuation reports, the collateral manager and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2013);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' (Jan. 23, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 2013).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance and Covered Bonds
- Security Upgrades & Downgrades
- Investment & Company Information
- Fitch Ratings
- subordinated notes
Primary Surveillance Analyst:
Joseph Farfsing, +1-312-368-3346
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Derek Miller, +1-312-368-2076
Sandro Scenga, +1-212-908-0278