Fitch to Rate Westcott Park CLO, Ltd./LLC; Issues Presale

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings expects to assign the following rating and Rating Outlook to Westcott Park CLO, Ltd./LLC:

--$413,440,000 class A notes 'AAAsf', Outlook Stable.

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

TRANSACTION SUMMARY

Westcott Park CLO, Ltd. (issuer) and Westcott Park CLO, LLC (co-issuer) together comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by GSO/Blackstone Debt Funds Management LLC (GSO/Blackstone). Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a $640 million portfolio of primarily senior secured leveraged loans. The CLO is expected to have an approximately 4.8-year reinvestment period and 2.8-year noncall period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 35.4% for the class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The degree of CE available to the class A notes is below the average 'AAAsf' CE of recent CLO issuances; however, cash flow modeling results indicate performance in line with other Fitch-rated 'AAAsf' CLO notes.

'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 notes are unlikely to be affected by the foreseeable level of defaults. Class A notes are projected to be able to withstand default rates of up to 62.0%.

Strong Recovery Expectations: The indicative portfolio consists of 96.8% first-lien senior secured loans and 3.2% second-lien loans. Approximately 88.6% 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 78.4%. In determining ratings for class A notes, 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 stresses, resulting in a 39.6% recovery rate assumption in Fitch's 'AAAsf' scenario.

Fitch's "Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds," dated May 2016, includes stresses to address the risk of negative interest rates in structured finance transactions. U.S. CLOs are unlikely to be affected by negative interest rates due to the prevalence of LIBOR floors in the U.S. loan market. Therefore, we applied the standard (positive) interest rate downward stresses in our analysis.

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 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.

Fitch published an exposure draft of its Counterparty Criteria for Structured Finance and Covered Bonds on April 14, 2016. The exposure draft serves as the operative criteria report for this ratings analysis. Under the exposure draft, a direct-support counterparty is expected to maintain a long-term rating of at least 'A' or a short-term rating of at least 'F1' in order to support note ratings of up to 'AAAsf'. The issuer's account holder, Wells Fargo Bank, National Association, satisfies the minimum expected ratings threshold for a direct-support counterparty under the exposure draft framework.

Fitch's existing counterparty criteria (dated May 14, 2014), as well as the issuer's governing documents, expect this role to be fulfilled by an institution with a long-term rating of at least 'A' and a short-term rating of at least 'F1'. Wells Fargo Bank's long-term and short-term ratings currently meet these expectations. Therefore the rating for class A notes remains achievable under Fitch's existing criteria.

The framework regarding expectations for qualified investments has not materially changed between the existing criteria and the exposure draft.

VARIATIONS FROM CRITERIA

Fitch currently addresses operational risk considerations of CLO managers through on-site reviews every two years and updates its assessment as necessary. A criteria variation from Fitch's Global Rating Criteria for CLOs and Corporate CDOs arises from the fact that Fitch's last on-site review of GSO/Blackstone was conducted more than two years ago. Fitch continues to deem GSO/Blackstone as an acceptable CLO manager.

DUE DILIGENCE USAGE

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

The publication of a representations, warranties and enforcement mechanisms appendix is not required for this transaction.

Additional information is available at www.fitchratings.com.

Sources of Information:

The information used to assess these ratings was provided by the arranger (Wells Fargo Securities, LLC) and the public domain.

Westcott Park CLO, Ltd./LLC

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882479

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

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

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

Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878412

Global Rating Criteria for CLOs and Corporate CDOs (pub. 12 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873664

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005783

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005783

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/20160608006540/en/

Fitch Ratings
Primary Analyst
Robert Rhein, +1-312-606-2314
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
John Um, CFA, +1-212-908-0287
Director
or
Committee Chairperson
Derek Miller, +1-312-368-2076
Managing Director
or
Media Relations
Sandro Scenga, +1-212-908-0278 (New York)
[email protected]

Source: Fitch Ratings

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