Fitch Rates LCM XIII Limited Partnership/LLC Refinancing Notes

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned 'AAAsf' ratings to the class A-R and X-R notes issued by LCM XIII Limited Partnership/LLC (LCM XIII). The Rating Outlook is Stable for each class of notes.

TRANSACTION SUMMARY

LCM XIII issued class A-R, X-R, B-R, C-R, D-R and E-R notes (collectively, the refinancing notes) and applied the net issuance proceeds thereof to redeem the class A, B, C, D and E notes at par plus accrued interest on the refinancing date of Dec. 16, 2016. Of the notes to be redeemed on the refinancing date, Fitch originally rated only the class A notes.

All of the refinancing notes will pay floating coupons. Spreads over LIBOR on the class A-R, X-R, B-R, C-R, D-R and E-R notes are 1.41%, 1.75%, 1.85%, 2.70%, 4.05% and 7.30%, respectively. The LP certificates were not refinanced. The stated maturity of the class A-R, B-R, C-R, D-R and E-R notes will be July 2027 and for the class X-R notes it will be October 2020.

In addition to the issuance of the refinancing obligations, the supplemental indenture also made the following changes to the transaction, inter alia:

--Reset the reinvestment period to approximately 4.6 years (ending July 2021);

--Reset the non-call period to approximately 2.1 years (ending January 2019);

--Introduced a new class X-R note that will receive interest and principal between the class A-R and B-R notes in the waterfalls and in the note payment sequence. The class X-R notes receive principal payments via the interest waterfall per a defined schedule that will amortize the notes equally over the first 16 payment periods;

--Changed the class C overcollateralization test trigger to 112.5%;

--Increased the allowance for covenant-lite loans to 65% from 40%;

--Restricted the purchase of bonds and senior secured notes;

--Restricted the purchase of long-dated obligations; however, the issuer retains the ability to obtain such assets through maturity amendments on the underlying loans;

--Modified the minimum purchase price of any new asset to be 50% of par from 60% of the leveraged loan index;

--Increased the minimum level of total potential indebtedness the issuer of a collateral obligation must have outstanding to $150 million from $125 million;

--Added provisions, whereby the class A-R notes would be made-whole through July 2019 if the notes are to be redeemed prior to such date;

--Revised provisions for eligible investments and counterparties; which conform with Fitch's criteria;

--A majority of the controlling class can now direct acceleration following an event of default; previously a supermajority vote was required;

--Added requirement that the interest rate of any additional issued notes be the same or lower than the corresponding class of notes.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 35.5% for class A-R notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in an 'AAAsf' stress scenario. The degree of CE available to the class A-R notes is slightly lower than the average CE of recent CLO issuances; however, cash flow modeling indicates performance in line with other Fitch-rated 'AAAsf' CLO notes. Class X-R notes are expected to be paid in full from the application of interest proceeds via the interest waterfall.

'B' Asset Quality: The average credit quality of the indicative portfolio is 'B', which is comparable with recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A-R and X-R notes are unlikely to be affected by the foreseeable level of defaults. Class A-R and X-R notes are projected to be able to withstand default rates of up to 61% and 100%, respectively.

Strong Recovery Expectations: The indicative portfolio consists of 98.5% first-lien senior secured loans. Approximately 90.6% of the indicative portfolio has strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, and the base case recovery assumption is 81.7%. In determining the notes' ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stress scenarios, resulting in a 39.5% recovery rate in Fitch's 'AAAsf' scenario.

The current portfolio, including a principal cash balance of approximately $2.3 million and excluding a defaulted obligation totalling $0.5 million, totals approximately $500.3 million as of the November 2016 trustee report. All collateral quality tests, concentration limitations and coverage tests are in compliance. The current weighted average spread (WAS) is 3.51% versus a minimum WAS trigger of 3.30%. The current weighted average life (WAL) is 4.1 years, and the weighted average Fitch rating of the portfolio is 'B'. Fitch currently considers 6.1% of the collateral assets to be rated in the 'CCC' category, based on Fitch's Issuer Default Rating (IDR) Equivalency Map.

FITCH ANALYSIS

Fitch's analysis focused on the Fitch stressed portfolio (FSP), given the reset terms of the transaction and the manager's ability to reinvest principal proceeds during the extended reinvestment period. Cash flow model analysis was conducted for the refinancing.

The FSP consisted of approximately $500.3 million of loans and included the following assumptions:

--90% senior secured loans and 10% second-lien loans;

--Maximum concentrations for the five largest obligors;

--Maximum concentrations for the three largest industries;

--7.5% 'CCC' rated collateral obligations;

--2% long-dated assets;

--8.6-year WAL;

--95% floating-rate assets earning a WAS of 3.30% over LIBOR (per the targeted WAS trigger indicated by the arranger) and 5% fixed-rate assets earning a weighted average coupon (WAC) of 7.25%;

--5% of the underlying assets pay interest semi-annually.

For additional details on the transaction, including its other concentration limitations, please refer to the New Issue Report published on April 8, 2013, available on www.fitchratings.com.

Projected default and recovery statistics of the FSP were generated using Fitch's portfolio credit model (PCM). The PCM default rate and recovery rate outputs for FSP at the 'AAAsf' rating stress were 61.3% and 39.5%, respectively.

Fitch's cash flow modeling considered nine stress scenarios to account for different combinations of three default timings and three interest rate stresses. In the analysis of the FSP, the class A-R notes passed the 'AAAsf' PCM hurdle rate in eight of nine stress scenarios with one marginal failure of 0.3% and the class X-R notes passed the 'AAAsf' PCM hurdle rate in all nine stress scenarios with a minimum cushion of 38.7%. Given the one marginal failure of the class A-R notes, Fitch tested the performance of the notes at a rating level one notch below the 'AAAsf' rating hurdle. The class A-R notes passed the 'AA+sf' PCM hurdle rate in all nine scenarios with a minimum cushion of 8.9% and, when testing a stressed portfolio consisting of 100% floating-rate assets, the class A-R notes passed the 'AAAsf' hurdle rate in all nine scenarios with a minimum cushion of 1.4%. The current portfolio consists of all floating-rate assets.

Fitch was comfortable assigning 'AAAsf' ratings to the class A-R and X-R notes because we believe the notes can sustain a robust level of defaults, combined with low recoveries, as well as other factors such as strong performance of the notes in the sensitivity scenarios. The Stable Outlooks on the class A-R and X-R notes reflect the expectation that the notes have sufficient levels of credit protection to withstand potential deterioration in the credit quality of the portfolio.

RATING SENSITIVITIES

Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions, including decreases in recovery rates and increases in default rates or correlation. Fitch expects the class A-R and class X-R notes to remain investment grade, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'Asf' and 'AAAsf' for the class A-R notes and were 'AAAsf' for the class X-R notes.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. Offering documents for U.S. CLO transactions do not typically include RW&Es that are available to investors and that relate to the asset pool underlying the security. However, the offering document of this transaction included a draft of the indenture as a supplemental exhibit, which contains RW&Es related to the underlying asset pool of the CLO. For further information, please see Fitch's Special Report titled 'Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions,' dated May 31, 2016.

Fitch has assigned the following ratings:

--$322,500,000 class A-R notes 'AAAsf; Outlook Stable;

--$1,750,000 class X-R notes 'AAAsf; Outlook Stable.

Fitch does not rate the class B-R, C-R, D-R or E-R notes or the LP certificates.

Additionally, the following class is 'Paid-in-Full' (PIF):

--$322,500,000 class A notes 'PIF'.

Additional information is available at www.fitchratings.com.

Sources of Information:

Information used to assess these ratings was obtained from the arranger (Deutsche Bank Securities Inc.) and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)

https://www.fitchratings.com/site/re/886006

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)

https://www.fitchratings.com/site/re/888492

Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Sep 2016)

https://www.fitchratings.com/site/re/887497

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Related Research

LCM XIII Limited Partnership/LLC -- Appendix

https://www.fitchratings.com/site/re/892107

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1016702

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016702

Endorsement Policy

https://www.fitchratings.com/regulatory

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