S&P: Four Corners CLO II Ltd. Rating Raised On One Class; Four Ratings Affirmed
Today's rating actions follow our review of the transaction's performance using data from the July 18, 2016, trustee report.
The upgrade reflects the transaction's $97.34 million in paydowns to the class A notes since our December 2013 rating actions. Following the July 2016 payment date, the class A notes have just $8.52 million, or 3.67% of their original balance, remaining. These paydowns resulted in improved reported overcollateralization (O/C) ratios since the November 2013 trustee report, which we used for our previous rating actions:The class A/B O/C ratio improved to 220.75% from 141.29%.The class C O/C ratio improved to 140.52% from 119.26%.The class D O/C ratio improved to 121.07% from 111.57%.The class E O/C ratio improved to 104.35% from 103.82%.As of the July 2016 trustee report, the balance of collateral with a maturity date after the transaction's stated maturity represented 27.08% of the portfolio. A CLO concentrated in long-dated assets could be exposed to market value risk at maturity because the collateral manager may have to sell long-dated assets for less than par to repay the CLO's subordinate rated notes when they mature (see "CDO Spotlight: The Relationship Between Long-Dated Assets And Market Value Risk In U. S. Cash Flow CLOs," published April 26, 2012). Our analysis took into account the potential market value and/or settlement-related risk arising from the potential liquidation of the remaining securities on the transaction's legal final maturity.
The rating on the class D notes is constrained at 'BBB+ (sf)' by the application of the largest obligor default test, a supplemental stress test included as part of our corporate collateralized debt obligation criteria.
Although the cash flow results indicated a lower rating for the class E notes, we view the overall credit seasoning as an improvement to the transaction. We also considered the relatively stable O/C ratios that currently have a significant cushion over their minimum requirements. However, any increase in defaults and/or par losses could lead to negative rating actions on the class E notes in the future.
The affirmations of the class A and B notes reflect our view that the credit support available is commensurate with the current rating level.
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 these rating actions.
We will continue to review whether, in our view, the ratings assigned to the notes remain consistent with the credit enhancement available to support them, and will take rating actions as we deem necessary.