OREANDA-NEWS. S&P Global Ratings today lowered its rating on the class E notes from KVK CLO 2014-1 Ltd., a U. S. collateralized loan obligation (CLO) managed by Kramer Van Kirk Credit Strategies L. P., which closed in April 2014. At the same time, we removed this rating from CreditWatch, where we had placed it on May 25, 2016, with negative implications. In addition, we affirmed our ratings on the class A-1, A-2, B, C, and D notes from the same transaction (see list).

Today's rating actions follow our review of the transaction's performance, using data from the July 5, 2016, trustee report. We also considered additional information provided by the collateral manager on trades executed after the July 2016 trustee report was released.

The transaction is scheduled to remain in its reinvestment period until May 2018.

The lowered rating reflects the decrease in credit support available to the class E notes and the decline in the underlying portfolio's credit quality. The amount of 'CCC' assets held in the portfolio has increased to $44.68 million as of the July 2016 trustee report from $13.70 million as of the May 2014 trustee report, which we used for our effective date analysis. The trustee also reported an increase in defaulted assets to $8.74 million from zero over the same time period. An above-average exposure to the distressed energy sector has also contributed to this distressed collateral total, as assets with an S&P Global Ratings' industry categorization of oil and gas and nonferrous metals/minerals were reported to be 7.87% of the total balance. A large percentage of the 'CCC' and defaulted collateral come from these two industry categories.

The underlying portfolio's deteriorated credit quality combined with par loss led to declines in the trustee-reported overcollateralization (O/C) ratios. The following O/C ratios are per the July 2016 report compared to the May 2014 numbers:The class A/B O/C ratio test decreased to 130.62% from 134.47%;The class C O/C ratio test decreased to 117.08% from 120.54%;The class D O/C ratio test decreased to 109.81% from 113.04%; andThe class E O/C ratio test decreased to 104.38% from 107.46%.In addition, the interest diversion test on the class E notes has also decreased, for the same reasons as noted above, to 104.38% from 107.46%. The current result passes the trigger by 8 basis points. The failure of this test would divert excess interest proceeds to purchase additional collateral or, at the option of the collateral manager, to pay the rated notes according to the note payment sequence in an amount equal to the lesser of the amount necessary to cause this test to pass and 50% of the total excess interest.

The decline in the credit support has been somewhat offset by both the recent positive credit migration and underlying collateral's seasoning. The portfolio's weighted average rating has improved from June 2016 to July 2016. Also, the reported weighted average life of the collateral has decreased to 4.48 years from 5.85 years since the effective date.

Although our cash flow analysis pointed to higher ratings for the class B, C, and D notes, we considered the exposure to stressed sectors, decline in credit support, the credit deterioration in the portfolio, and the cushion at the higher ratings, as well as other stress tests to allow for volatility in the underlying portfolio given that the transaction is still in its reinvestment period, and affirmed these tranches at their current rating levels.

Our review of this transaction included a cash flow analysis, based on the portfolio and transaction as reflected in the aforementioned trustee report, to estimate future performance. In line with our criteria, our cash flow scenarios applied forward-looking assumptions on the expected timing and pattern of defaults and recoveries upon default under various interest rate and macroeconomic scenarios. In addition, our analysis considered the transaction's ability to pay timely interest and/or ultimate principal to each of the rated tranches. The results of the cash flow analysis demonstrated, in our view, that all of the rated outstanding classes have adequate credit enhancement available at the rating levels associated with this rating action.

S&P Global Ratings will continue to review whether, in its view, the ratings assigned to the notes remain consistent with the credit enhancement available to support them and take rating actions as it deems necessary.