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Newhaven CLO, DAC European Reset CLO Notes Assigned Ratings

Ratings Assigned
Class Rating Balance (mil. €) Subordination (%) Interest rate
X AAA (sf) 3.00 N/A Three/six-month EURIBOR plus

0.30%

A AAA (sf) 217.00 38.00 Three/six-month EURIBOR plus

0.82%

B AA (sf) 29.05 29.70 Three/six-month EURIBOR plus

1.70%

C A (sf) 21.70 23.50 Three/six-month EURIBOR plus

2.50%

D BBB- (sf) 26.25 16.00 Three/six-month EURIBOR plus

3.70%

E BB- (sf) 21.00 10.00 Three/six-month EURIBOR plus

6.45%

F B- (sf) 9.625 7.25 Three/six-month EURIBOR plus

8.49%

Sub notes NR 50.00 N/A N/A
NR--Not rated. N/A--Not applicable. EURIBOR--Euro Interbank Offered Rate.

Overview

  • We have assigned ratings to Newhaven CLO's class X to F notes.
  • Newhaven CLO is a European cash flow CLO transaction, securitizing a portfolio of primarily senior secured leveraged loans and bonds.

LONDON (S&P Global Ratings) April 9, 2021--S&P Global Ratings today assigned its credit ratings to Newhaven CLO, DAC's class X, A, B, C, D, E, and F notes. At closing, the issuer also issued unrated subordinated notes (see list above).

Newhaven CLO is a European cash flow CLO transaction, securitizing a portfolio of primarily senior secured leveraged loans and bonds. The transaction is managed by Bain Capital Credit Ltd.

The ratings assigned to Newhaven CLO DAC's notes reflect our assessment of:

  • The diversified collateral pool, which consists primarily of broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality tests.
  • The credit enhancement provided through the subordination of cash flows, excess spread, and overcollateralization.
  • The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading.
  • The transaction's legal structure, which is bankruptcy remote.
  • The transaction's counterparty risks, which is in line with our counterparty rating framework.

A notable feature in this transaction is the introduction of loss mitigation obligations. Loss mitigation obligations allow the issuer to participate in potential new financing initiatives by a borrower in default or in distress. This feature aims to mitigate the risk of other market participants taking advantage of CLO restrictions, which typically do not allow the CLO to participate in a defaulted entity new financing request, and hence increase the chance of increased recovery for the CLO. While the objective is positive, it may lead to par erosion as additional funds will be placed with an entity that is under distress or in default. This may cause greater volatility in our ratings if these loans' positive effect does not materialize. In our view, the restrictions on the use of proceeds and the presence of a bucket for such loss mitigation loans helps to mitigate the risk.

Loss mitigation obligation mechanics

Under the transaction documents, the issuer can purchase loss mitigation obligations, which are assets of an existing collateral obligation held by the issuer, offered in connection with bankruptcy, workout, or restructuring of the obligation, to improve the recovery value of the related collateral obligation.

The purchase of loss mitigation obligations is not subject to the reinvestment or eligibility criteria. They receive no credit in the principal balance definition--except where loss mitigation obligations meet the eligibility criteria, with certain exclusions, and are purchased using principal proceeds–-in which case they are afforded defaulted treatment in par coverage tests.

To protect the transaction from par erosion, any distributions received from loss mitigation obligations, which are afforded credit in the par coverage tests, will irrevocably form part of the issuer's principal account proceeds. The cumulative exposure to loss mitigation obligations is limited to 10% of target par.

The issuer may purchase loss mitigation obligations using either interest proceeds, principal proceeds, or amounts in the supplemental reserve account. The use of interest proceeds to purchase loss mitigation obligations is subject to all interest coverage tests passing following the purchase, and the manager determining that there are sufficient interest proceeds to pay interest on all the rated notes on the upcoming payment date.

The use of principal proceeds is subject to passing par coverage tests and the manager having built sufficient excess par in the transaction so that the principal collateral amount is equal to or exceeds the portfolio's target par balance after the reinvestment.

To protect the transaction from par erosion, any distributions received from loss mitigation obligations that are either purchased with the use of principal, or purchased with interest or amounts in the supplemental account--and have been afforded credit in the coverage tests--will irrevocably form part of the issuer's principal account proceeds and cannot be recharacterized as interest.

The portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow CDOs (see "Global Methodology And Assumptions For CLOs And Corporate CDOs," published on June 21, 2019). As such, we have not applied any additional scenario and sensitivity analysis when assigning preliminary ratings to any classes of notes in this transaction.

In our cash flow analysis, we used the €350 million target par amount, the covenanted weighted-average spread (3.55%), the reference weighted-average coupon (4.25%), and the covenanted weighted-average recovery rates as indicated by the collateral manager. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category. Our credit and cash flow analysis indicates that the available credit enhancement for the class B to E notes could withstand stresses commensurate with higher rating levels than those we have assigned. However, as the CLO is in its reinvestment phase, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes.

Under our structured finance ratings above the sovereign criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned rating levels (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).

Until the end of the reinvestment period on Feb. 15, 2025, the collateral manager may substitute assets in the portfolio for so long as our CDO Monitor test is maintained or improved in relation to the initial ratings on the notes. This test looks at the total amount of losses that the transaction can sustain as established by the initial cash flows for each rating, and compares that with the default potential of the current portfolio plus par losses to date. As a result, until the end of the reinvestment period, the collateral manager can, through trading, deteriorate the transaction's current risk profile, as long as the initial ratings are maintained.

The transaction's documented counterparty replacement and remedy mechanisms adequately mitigate the exposure to counterparty risk under our current counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," published on March 8, 2019).

The transaction's legal structure is bankruptcy remote, in line with our legal criteria (see "Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).

Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our ratings are commensurate with the available credit enhancement for each class of notes.

In addition to our standard analysis, to provide an indication of how rising pressures among speculative-grade corporates could affect our ratings on European CLO transactions, we have also included the sensitivity of the ratings on the class A to E notes to five of the 10 hypothetical scenarios we looked at in our publication "How Credit Distress Due To COVID-19 Could Affect European CLO Ratings," published on April 2, 2020 (see chart below).

image

As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F-R notes.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Newhaven CLO DAC is a broadly syndicated CLO managed Bain Capital Credit Ltd.

Related Criteria

Related Research

Primary Credit Analyst:Sandeep Chana, London + 44 20 7176 3923;
sandeep.chana@spglobal.com
Secondary Contacts:Matteo Breviglieri, London (44) 20-7176-8495;
Matteo.Breviglieri@spglobal.com
Emanuele Tamburrano, London + 44 20 7176 3825;
emanuele.tamburrano@spglobal.com

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