OREANDA-NEWS. S&P Global Ratings today raised its ratings on the class A-2, B, and C notes and affirmed its ratings on the class A-1, D, and E notes from OZLM Funding IV Ltd., a U. S. collateralized loan obligation (CLO) transaction that closed in 2013 and is managed by Och-Ziff Loan Management LP (see list).

Today's rating actions follow our review of the transaction's performance, using data from the July 14, 2016, trustee report. The transaction is scheduled to remain in its reinvestment period until July 2017.

The upgrades primarily reflect credit quality improvement in the underlying collateral since our rating affirmations in January 2014 following the transaction's effective date.

Collateral with an S&P Global Ratings' credit rating of 'BB-' or higher has increased significantly since the September 2013 effective date report, which we used for our previous rating actions. The higher-rated collateral has caused the portfolio's weighted average rating to rise to 'B+' from 'B'. In addition, the higher-rated collateral has resulted in a decrease in weighted average spread to 4.20% reported in July 2016 compared with 4.46% reported in the effective date report, and has resulted in an increase in the reported weighted average S&P Global Ratings' recovery rate over the same period.

The transaction has also benefited from collateral seasoning, with the reported weighted average life decreasing to 4.71 years from 5.65 years in September 2013. This seasoning, combined with the improved credit quality, has decreased the overall credit risk profile. In addition, the number of issuers in the portfolio has increased during this period resulting in improved portfolio diversification.

The transaction has experienced an increase in both defaults and assets rated 'CCC+' and below since the September 2013 effective date report. Specifically, the amount of defaulted assets increased to $4.66 million as of July 2016 from zero as of the effective date report. The par balance of assets rated 'CCC+' and below increased to $16.27 million from zero over the same period. The increase in defaulted assets, as well as other factors, has affected the level of credit support available to all tranches, as seen by the mild decline in the overcollateralization (O/C) ratios since the effective date report: The class A O/C ratio was 132.72% in July 2016, down from 133.10%.The class B O/C ratio was 121.25% in July 2016, down from 121.60%. The class C O/C ratio was 113.82% in July 2016, down from 114.14%.The class D O/C ratio was 108.10% in July 2016, down from 108.40%.The class E O/C ratio was 105.13% in July 2016, down from 105.43%.However, the current coverage test ratios are all passing and above their minimum threshold values. Overall, the increase in defaulted assets and assets rated 'CCC+' and below has been largely offset by the decline in the weighted average life and positive credit migration of the collateral portfolio.

Although our cash flow analysis indicated higher ratings for the class B, C, and D notes, our rating actions considered the increase in defaults and decline in the portfolio's credit support. In addition, the ratings reflect additional sensitivity runs that allowed for volatility in the underlying portfolio given that the transaction is still in its reinvestment period.

On a stand-alone basis, the cash flow analysis results indicated a lower rating for the class E notes. However, we believe that as the transaction enters its amortization period following the end of its reinvestment period, the transaction may begin to pay down the rated notes sequentially, starting with the class A-1 notes, which, all else remaining equal, will begin to increase the O/C levels. In addition, because the transaction currently has minimal exposure to 'CCC' rated collateral obligations and no exposure to long-dated assets (i. e., assets maturing after the CLO's stated maturity), we believe it is not currently exposed to large risks that would impair the current rating on the notes. In line with this, we affirmed the rating on the class E notes.

The affirmations of the ratings on the class A-1, D, and E notes reflect our belief that the credit support available is commensurate with the current rating levels.

Our review of the transaction relied, in part, upon a criteria interpretation with respect to our May 2014 criteria, "CDOs: Mapping A Third Party's Internal Credit Scoring System To Standard & Poor's Global Rating Scale," which allows us to use a limited number of public ratings from other Nationally Recognized Statistical Rating Organizations (NRSROs) to assess the credit quality of assets not rated by S&P Global Ratings. The criteria provide specific guidance for the treatment of corporate assets not rated by S&P Global Ratings, while the interpretation outlines the treatment of securitized assets.

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.