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Accunia European CLO II DAC Class B-1 To D European Cash Flow Notes Upgraded; Other Ratings Affirmed

Ratings List
Class Rating to Rating from
Ratings raised
B-1 AA+ (sf) AA (sf)
B-2 AA+ (sf) AA (sf)
C A+ (sf) A (sf)
D BBB+ (sf) BBB (sf)
Ratings affirmed
A AAA (sf)
E BB (sf)
F B- (Sf)

Overview

  • We raised our ratings on the class B-1, B-2, C, and D notes in Accunia European CLO II DAC following our review of the transaction.
  • At the same time, we affirmed our ratings on the class A, E, and F notes.
  • Accunia European CLO II DAC is a European cash flow CLO transaction that securitizes loans granted to primarily speculative-grade corporate firms. The transaction is managed by Accunia Fondsmæglerselskab A/S.

LONDON (S&P Global Ratings) Sept. 21, 2022--S&P Global Ratings today raised its credit ratings on Accunia European CLO II DAC's class B-1, B-2, C, and D notes. At the same time, we affirmed our ratings on the class A, E, and F notes (see list).

Today's rating actions follow the application of our global corporate CLO criteria and our credit and cash flow analysis of the transaction based on the July 2022 trustee report.

Our rating addresses timely interest and ultimate principal on the class A and B notes (B-1 and B-2) and ultimate interest and principal on the class C to F notes.

Since the transaction closed in 2017 (see "Related Research"):

  • The weighted-average rating of the portfolio is 'B', which is unchanged since closing.
  • As the CLO has begun its amortization phase, the portfolio has become less diversified (number of performing obligors has decreased to 100 from 110).
  • The portfolio's weighted-average life has also decreased to 3.44 years from 6.01 years.
  • The percentage of 'CCC' rated assets has increased to 8.11% from 2.67%.

Despite a more concentrated portfolio and slight deterioration in credit quality, the scenario default rates have decreased for all rating scenarios mainly due to the reduction in the weighted-average life of the portfolio to 3.44 years from 6.01 years.

Portfolio Benchmarks
Current At close
SPWARF 2,923.32 2524.51*
Default rate dispersion (%) 691.31 638.05
Weighted-average life (years) 3.44 6.01
Obligor diversity measure 79.78 94.52
Industry diversity measure 19.33 21.01
Regional diversity measure 1.22 1.51
*Calculated using the portfolio at closing and applying current CLO criteria to derive an SPWARF for the comparison of portfolio credit quality. SPWARF—S&P Global Ratings weighted-average rating factor.

On the cash flow side:

  • The reinvestment period for the transaction ended in October 2021.The class A notes have deleveraged by €47.32 million, since then.
  • No class of notes is currently deferring interest.
  • All coverage tests are passing as of the July 2022 trustee report.

Transaction Key Metrics
Current At close
Total collateral amount (mil. €)* 318.19 375.00
Defaulted assets (mil. €) 0.00 0.00
Number of performing obligors 100 110
Portfolio weighted-average rating B B
'CCC' assets (%) 8.11% 2.67%
'AAA' SDR (%) 59.66% 66.38%
'AAA' WARR (%)
*Performing assets plus cash and expected recoveries on defaulted assets. SDR--scenario default rate. WARR--Weighted-average recovery rate.

Credit Enhancement
Current (%) At Close (%)
A 44.63 40.40
B-1 29.83 27.84
B-2 29.83 27.84
C 22.57 21.68
D 17.13 17.07
E 10.31 11.28
F 6.38 7.95
Sub N/A N/A
Credit enhancement = [Performing balance + cash balance + recovery on defaulted obligations (if any) – tranche balance (including tranche balance of all senior tranches)]/ [Performing balance + cash balance + recovery on defaulted obligations (if any)].

In our view, the portfolio is diversified across obligors, industries, and asset characteristics. Nevertheless, due to the CLO entering in its amortization phase, it has become more concentrated (in comparison with the closing analysis). The aggregate exposure to the top 10 obligors is now 21%. At the same time, there has been an increase in assets paying semiannually, which now account for almost 37% of the portfolio. The CLO has a smoothing account that helps to mitigate any frequency timing mismatch risks. Hence, we have performed additional scenario analysis by applying a spread and recovery compression analysis.

Based on the improved scenario default rates, higher portfolio weighted-average recovery, and higher credit enhancement available to the notes, we have raised our ratings on the class B-1, B-2, C, and D notes as the available credit enhancement is now commensurate with higher levels of stresses. We have therefore:

  • Raised to 'AA+ (sf)' from 'AA (sf)' our ratings on the class B-1 and B-2 notes;
  • Raised to 'A+ (sf)' from 'A (sf)', our ratings on the class C notes; and
  • Raised to 'BBB+ (sf)' from 'BBB (sf)', our ratings on the class D notes.

At the same time, we have affirmed our 'AAA (sf)', 'BB (sf)', and 'B- (sf)' ratings on the class A, E, and F notes, respectively.

The cash flow analysis indicated higher ratings than those currently assigned for the class C, D, and E notes (without the additional sensitivity analysis discussed above). However, today's rating actions on these classes of notes address concentration risk and the future effect this may have on the weighted-average spread and recovery generated on the portfolio. For these classes of notes, we considered that the manager may still reinvest unscheduled redemption proceeds and sale proceeds from credit-impaired and credit-improved assets (such reinvestments, as opposed to repayment of the liabilities, may therefore prolong the note repayment profile for the most senior class of notes), the considerable portion of senior notes outstanding, the current macroeconomic environment, and the seniority of these classes of notes. Considering all of these factors, we have affirmed our 'BB (sf)' rating on the class E notes. We have also raised our ratings on the class C and D notes by one notch.

For the class F notes, our credit and cash flow analysis indicates that the available credit enhancement could withstand stresses that are commensurate with a lower rating. However, we have applied our 'CCC' rating criteria resulting in a 'B- (sf)' rating on this class of notes (see "Related Criteria").

Our affirmation of our 'B- (sf)' rating on the class F notes reflects the available credit enhancement for this class of notes, the portfolio's average credit quality and, comparing our model generated BDR at the 'B-' rating level versus the long-term sustainable default rate.

We also assessed (i) whether the tranche is vulnerable to nonpayments in the near future, (ii) if there is a one in two chance of this tranche defaulting, and (iii) if we envision this tranche to default in the next 12-18 months.

Following this analysis, we consider that the available credit enhancement for the class F notes is commensurate with a 'B- (sf)' rating.

Counterparty, operational, and legal risks are adequately mitigated in line with our criteria.

Following the application of our structured finance sovereign risk criteria, we consider the transaction's exposure to country risk to be limited at the assigned ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).

Related Criteria

Related Research

Primary Credit Analyst:Abhijit A Pawar, London + 44 20 7176 3774;
abhijit.pawar@spglobal.com
Secondary Contact:Emanuele Tamburrano, London + 44 20 7176 3825;
emanuele.tamburrano@spglobal.com
Research Contributor:Harshala Koyande, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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