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Fitch Affirms Halycon Loan Advisors Funding 2014-1 Ltd./LLC

NEW YORK–(BUSINESS WIRE)–

Fitch Ratings has affirmed the class X, A-1, A-2 notes and the class A loans issued by Halycon Loan Advisors Funding 2014-1 Ltd./LLC (Halcyon 2014-1) at ‘AAAsf’. The Rating Outlook remains Stable.

KEY RATING DRIVERS

The affirmation is based on the stable performance of the underlying portfolio since the transaction’s inception in March 2014 and the credit enhancement available to the notes. As of the Jan. 5, 2015 trustee report, the transaction continues to pass all of its coverage tests and collateral quality tests, and there have been no defaults in the underlying portfolio to date.

The loan portfolio par amount plus principal cash is approximately $402.4 million, compared to the effective date target par balance of $400 million, resulting in an increase in credit enhancement levels for the notes and the class A loans. The weighted average rating has remained in the ‘B/B-‘ range, and Fitch currently considers 3.1% of the portfolio (including unsettled trades) to be rated in the ‘CCC’ category versus 7.5% in the indicative portfolio at closing, based upon Fitch’s Issuer Default Rating (IDR) Equivalency Map. The weighted average spread (WAS) has increased to 5.7% from 5.1% at closing, relative to the trigger level of 4.4%. The weighted average life (WAL) is 5.0 years, which is below the trigger level of 7.2 years. The portfolio (including unsettled trades) is invested in approximately 96.1% senior secured loans and 3.9% second lien loans. In addition, approximately 91.9% of the portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of ‘RR2’ or higher.

The Stable Outlooks reflect the expectation that the class X, A-1, and A-2 notes and class A loans have a sufficient level of credit protection to withstand potential deterioration in the credit quality of the portfolio, based on the results of the Fitch sensitivity analysis described below.

RATING SENSITIVITIES

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, overcollateralization (OC) or interest coverage (IC) test breaches, or breach of concentration limitations or portfolio quality covenants. Fitch conducted rating sensitivity analysis on the closing date of Halcyon 2014-1, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.

Halcyon 2014-1 is an arbitrage, cash flow collateralized loan obligation (CLO) managed by Halcyon Loan Advisors 2014-1 LLC (a wholly owned subsidiary of Halcyon Loan Management, LLC). The transaction remains in its reinvestment period, which is scheduled to end in April 2018. During the reinvestment period discretionary sales within a 12-month period are limited to 25% of the portfolio balance, as measured by the balance at the beginning of the preceding 12-month period. Sales of defaulted, credit-risk and credit-improved securities are permitted at any time, including after the reinvestment period, with the sale of credit-improved assets subject to certain restrictions. The manager also has the ability to reinvest unscheduled principal proceeds and sales proceeds from the disposal of credit risk assets after the reinvestment period, subject to certain conditions.

The class A loans were issued at close and include a conversion option to be converted into class A-2 notes. Once the option is exercised, the aggregate outstanding amount of the class A-2 notes will be increased by the outstanding principal amount of the class A loans and the class A loans shall cease to be outstanding. The conversion option may be exercised only once and no class A-2 notes may be converted into class A loans. The class A-2 notes continue to have a zero balance.

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 levels for the underlying portfolio. Given the stable performance of the deal since closing, no updated cash flow modeling was completed. The current portfolio’s ‘AAAsf’ Rating Default Rate (RDR) and Rating Recovery Rate (RRR) outputs from PCM are 53.1% and 38.8%, respectively, versus an RDR of 53.6% and RRR of 38.6% for the indicative portfolio at closing.

Initial Key Rating Drivers and Rating Sensitivity are further described in the New Issue Report published on Aug. 6, 2014. A comparison of the transaction’s Representations, Warranties, and Enforcement Mechanisms (RW&Es) to those of typical RW&Es for that asset class is also available by accessing the reports and links indicated below.

Fitch has affirmed the following ratings:

–$1,575,000 class X notes ‘AAAsf’; Outlook Stable;

–$199,000,000 class A-1 notes ‘AAAsf’; Outlook Stable,

–$0 class A-2 notes ‘AAAsf’; Outlook Stable;

–$50,000,000 class A loans ‘AAAsf’; Outlook Stable.

Fitch does not rate the class B-1, B-2, C, D, E, F or subordinated notes.

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

The information used to assess these ratings was sourced from periodic servicer reports, note valuation reports, and the public domain.

Applicable Criteria & Related Research:

–‘Global Structured Finance Rating Criteria’ (Aug. 4, 2014);

–‘Global Rating Criteria for Corporate CDOs’ (July 25, 2014);

–‘Counterparty Criteria for Structured Finance and Covered Bonds’ (May 14, 2014);

–‘Halcyon Loan Advisors Funding 2014-1 Ltd./LLC New Issue Report’ (Aug. 6, 2014)

–‘Halcyon Loan Advisors Funding 2014-1 Ltd./LLC – Appendix’ (Aug. 6, 2014).

Applicable Criteria and Related Research:

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389

Global Rating Criteria for Corporate CDOs

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

Counterparty Criteria for Structured Finance and Covered Bonds

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

Halcyon Loan Advisors Funding 2014-1 Ltd./LLC

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751434

Halcyon Loan Advisors Funding 2014-1 Ltd./LLC — Appendix

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753097

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979255

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Fitch Ratings

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Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

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Senior Director

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sandro.scenga@fitchratings.com […]