Sound Point Euro CLO III Funding European Cash Flow CLO Notes Assigned Ratings

  • We have assigned ratings to Sound Point Euro CLO III Funding's European cash flow CLO notes.
  • The transaction securitizes a portfolio of primarily senior secured leveraged loans and bonds.
LONDON (S&P Global Ratings) March 24, 2020--S&P Global Ratings today assigned credit ratings to the class X to F European cash flow CLO notes issued by Sound Point Euro CLO III Funding DAC. At closing, the issuer also issued unrated class Z and subordinated notes (see list above).
The ratings reflect our assessment of:
  • The diversified collateral pool, which consists primarily of broadly syndicated speculative-grade senior secured term loans and bonds that are governed by collateral quality tests.
  • The credit enhancement, which is provided through the subordination of cash flows, excess spread, and overcollateralization.
  • The collateral manager's experienced team, which can affect the performance of the rated notes through collateral selection, ongoing portfolio management, and trading.
  • The transaction's legal structure, which is bankruptcy remote.
  • The transaction's counterparty risks, which are in line with our counterparty rating framework.

Table 1

Portfolio Benchmarks
Current
S&P weighted-average rating factor2660
Default rate dispersion632
Weighted-average life (years)5.66
Obligor diversity measure102.07
Industry diversity measure21.51
Regional diversity measure1.22

Table 2

Transaction Key Metrics
Current
Total par amount (mil. €)400
Defaulted assets (mil. €)0
Number of performing obligors126
Portfolio weighted-average rating derived from our CDO evaluator'B'
'CCC' category rated assets (%)0
Covenanted 'AAA' weighted-average recovery (%)35.86
Covenanted weighted-average spread (%)3.6
Reference weighted-average coupon (%)5.0
Under the transaction documents, the rated notes pay quarterly interest unless a frequency switch event occurs. Following this, the notes will permanently switch to semiannual payments. We note that the interest amount from the semiannual obligations will not be trapped in the interest smoothing account for so long as any of the following apply: (i) the aggregate principal amount of the semiannual obligations is less than or equal to 5%; and (ii) the class F interest coverage ratio is equal to or greater than 100% when excluding any payments received from the semiannual obligations. The portfolio's reinvestment period ends approximately four-and-a-half years after closing.
The portfolio is well-diversified, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we have conducted our credit and cash flow analysis by applying our criteria for corporate cash flow collateralized debt obligations (CDOs; see "Global Methodology And Assumptions For CLOs And Corporate CDOs," published on June 21, 2019). As such, we have not applied any additional scenario and sensitivity analysis when assigning ratings to any classes of notes in this transaction.
In our cash flow analysis, we used the €400 million target par amount, the covenanted weighted-average spread (3.60%), the reference weighted-average coupon (5.00%), and the target minimum weighted-average recovery rate as indicated by the collateral manager. We applied various cash flow stress scenarios, using four different default patterns, in conjunction with different interest rate stress scenarios for each liability rating category. Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1 to F notes could withstand stresses commensurate with higher ratings than those we have assigned. However, as the CLO will be in its reinvestment phase starting from closing, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes.
Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned rating levels (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).
Until the end of the reinvestment period on Oct. 15, 2024, the collateral manager is allowed to substitute assets in the portfolio for so long as our CDO Monitor test is maintained or improved in relation to the initial ratings on the notes. This test looks at the total amount of losses that the transaction can sustain as established by the initial cash flows for each rating, and compares that with the default potential of the current portfolio plus par losses to date. As a result, until the end of the reinvestment period, the collateral manager can, through trading, deteriorate the transaction's current risk profile, as long as the initial ratings are maintained.
The transaction's documented counterparty replacement and remedy mechanisms adequately mitigate its exposure to counterparty risk under our current counterparty criteria (see "Counterparty Risk Framework: Methodology And Assumptions," published on March 8, 2019).
The transaction's legal structure is bankruptcy remote, in line with our legal criteria (see "Asset Isolation And Special-Purpose Entity Methodology," published on March 29, 2017).
Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe our ratings are commensurate with the available credit enhancement for each class of notes.
The transaction securitizes a portfolio of primarily senior secured leveraged loans and bonds, and is managed by Sound Point CLO C-MOA LLC.
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