Fitch to Rate Canyon CLO 2016-2, Ltd./LLC; Issues Presale

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings expects to assign the following ratings and Rating Outlooks to Canyon CLO 2016-2, Ltd./LLC:

--$288,000,000 class A notes 'AAAsf'; Outlook Stable;

--$57,800,000 class B notes 'AAsf'; Outlook Stable.

Fitch does not expect to rate the class C, D or E notes or the subordinated notes.

TRANSACTION SUMMARY

Canyon CLO 2016-2, Ltd. (the issuer) and Canyon CLO 2016-2, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Canyon CLO Advisors LLC. Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $450 million of primarily senior secured leveraged loans. The CLO will have a four-year reinvestment period and a two-year noncall period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 36% for class A notes and 23.2% for class B notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the respective 'AAAsf' and 'AAsf' stress scenarios. Compared with CE levels of recent CLO issuances for notes in the same respective rating categories, the degree of CE available is in line for class A notes and below average for class B notes. However, cash flow modeling results for the two classes indicate performance in line with other Fitch-rated CLO notes at their respective ratings.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A and B notes are unlikely to be affected by the foreseeable level of defaults. Class A and B notes are projected to be able to withstand default rates of up to 60.2% and 55.4%, respectively.

Strong Recovery Expectations: The indicative portfolio consists of 97.7% first-lien senior secured loans. Approximately 91.5% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, and the base case recovery assumption is 78.9%. In determining the class A and B note ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions of higher rating stress assumptions, resulting in 39.8% and 47.8% recovery rate assumptions in Fitch's respective 'AAAsf' and 'AAsf' scenarios.

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 and B notes to remain investment grade, even under the most extreme sensitivity scenarios. Results under these sensitivity scenarios ranged between 'A+sf' and 'AAAsf' for the class A notes and

'BBB-sf' and AA+sf for the class B notes.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

Click on the link below for an analysis of the representations, warranties, and enforcement mechanisms available to investors in transaction documents for this transaction and how they compare to those of similar securities.

Additional information is available at www.fitchratings.com.

Sources of Information:

The information used to assess these ratings was provided by the arranger (J.P. Morgan Securities LLC) and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=884963

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879815

Global Rating Criteria for CLOs and Corporate CDOs (pub. 28 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885653

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

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883130

Related Research

Canyon CLO 2016-2, Ltd./LLC

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885577

Canyon CLO 2016-2, Ltd./LLC -- Appendix

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=885722

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010001

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010001

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160804006544/en/

Fitch Ratings
Primary Analyst
Christine Yoon
Senior Director
+1-212-908-0603
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
John Um, CFA
Director
+1-212-908-0287
or
Committee Chairperson
Derek Miller
Managing Director
+1-312-368-2076
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
[email protected]
Hannah James, New York, +1-646-582-4947
[email protected]

Source: Fitch Ratings

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