| Ratings list | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Class | Rating* | Amount (mil. €) | Interest rate§ | Credit enhancement (%) | ||||||
| A-R | AAA (sf) | 248.00 | 3mE + 1.37% | 38.00 | ||||||
| B-1-R | AA (sf) | 37.00 | 3mE + 2.10% | 27.50 | ||||||
| B-2-R | AA (sf) | 5.00 | 5.75% | 27.50 | ||||||
| C-R | A (sf) | 26.40 | 3mE + 3.00% | 20.90 | ||||||
| D-R | BBB- (sf) | 26.60 | 3mE + 4.30% | 14.25 | ||||||
| E-R | BB- (sf) | 17.00 | 3mE + 6.60% | 10.00 | ||||||
| F-R | B- (sf) | 12.00 | 3mE + 8.30% | 7.00 | ||||||
| Subordinated notes | NR | 38.70 | N/A | N/A | ||||||
| *The ratings assigned to the class A-R, B-1-R, and B-2-R notes address timely interest and ultimate principal payments. The ratings assigned to the class C-R, D-R, E-R, and F-R notes address ultimate interest and principal payments. §The payment frequency switches to semiannual and the index switches to 6mE when a frequency switch event occurs. NR--Not rated. N/A--Not applicable. 3mE--Three-month Euro Interbank Offered Rate. | ||||||||||
Overview
- We assigned ratings to Rockford Tower Europe CLO 2018-1 DAC's cash flow CLO reset notes.
- The transaction securitizes a portfolio of primarily senior-secured leveraged loans and bonds and is managed by Rockford Tower Capital Management LLC.
- This transaction is a reset of the already existing transaction. The existing classes of notes were fully redeemed with the proceeds from the issuance of the replacement notes on the reset date.
LONDON (S&P Global Ratings) April 5, 2024 --S&P Global Ratings today assigned its credit ratings to Rockford Tower Europe CLO 2018-1 DAC's class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R notes. At closing, the issuer also issued subordinated notes (see list).
This transaction is a reset of the already existing transaction. The existing classes of notes were fully redeemed with the proceeds from the issuance of the replacement notes on the reset date.
The ratings reflect our assessment of:
- The diversified collateral pool, which primarily comprises broadly syndicated speculative-grade senior-secured term loans and bonds that are governed by collateral quality tests.
- The credit enhancement 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 we are in line with our counterparty rating framework.
| Portfolio benchmarks | |
|---|---|
| Current | |
| S&P weighted-average rating factor | 2,832.73 |
| Default rate dispersion | 710.36 |
| Weighted-average life (years) | 3.94 |
| Obligor diversity measure | 114.50 |
| Industry diversity measure | 25.86 |
| Regional diversity measure | 1.48 |
| Transaction key metrics | |
|---|---|
| Current | |
| Portfolio weighted-average rating derived from our CDO evaluator | B |
| 'CCC' category rated assets (%) | 3.42 |
| Actual 'AAA' weighted-average recovery (%) | 37.80 |
| Actual weighted-average spread (%) | 3.93 |
| Actual weighted-average coupon (%) | 3.39 |
Under the transaction documents, the rated notes will pay quarterly interest unless a frequency switch event occurs. Following this, the notes will switch to semiannual payments. The portfolio's reinvestment period will end approximately 2.05 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 CDOs (see "Global Methodology And Assumptions For CLOs And Corporate CDOs," published on June 21, 2019).
In our cash flow analysis, we used the €400 million target par amount, and the portfolio's covenanted weighted-average spread (3.93%), covenanted weighted-average coupon (4.75%), and covenanted weighted-average recovery rates at each rating level. 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.
Until the end of the reinvestment period on April 24, 2026, the collateral manager may 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 it compares that with the current portfolio's default potential plus par losses to date. As a result, until the end of the reinvestment period, the collateral manager may through trading deteriorate the transaction's current risk profile, as long as the initial ratings are maintained.
Under our structured finance sovereign risk criteria, we consider that the transaction's exposure to country risk is sufficiently mitigated at the assigned ratings (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).
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 and framework 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 rating is commensurate with the available credit enhancement for the class A-R, B-1-R, B-2-R, C-R, D-R, E-R, and F-R notes.
Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1-R, B-2-R, C-R, and D-R 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.
For the class F-R notes, our credit and cash flow analysis indicates that the available credit enhancement could withstand stresses commensurate with a lower rating. However, we have applied our 'CCC' rating criteria, resulting in a 'B- (sf)' rating on this class of notes (see "Related Criteria").
The ratings uplift for the class F-R notes reflects several key factors, including:
- The class F-R notes' available credit enhancement, which is in the same range as that of other CLOs we have rated and that have recently been issued in Europe.
- The portfolio's average credit quality, which is similar to other recent CLOs.
- Our model generated break-even default rate at the 'B-' rating level of 19.20% (for a portfolio with a weighted-average life of 3.94 years), versus if we were to consider a long-term sustainable default rate of 3.1% for 3.94 years, which would result in a target default rate of 12.21%.
- We do not believe that there is a one-in-two chance of this note defaulting.
- We do not envision this tranche defaulting in the next 12-18 months.
- Following this analysis, we consider that the available credit enhancement for the class F-R notes is commensurate with the assigned 'B- (sf)' rating.
In addition to our standard analysis, we have also included the sensitivity of the ratings on the class A-R to E-R notes based on four hypothetical scenarios. The results are shown in the chart below.
As our ratings analysis makes additional considerations before assigning ratings in the 'CCC' category, and we would assign a 'B-' rating if the criteria for assigning a 'CCC' category rating are not met, we have not included the above scenario analysis results for the class F-R notes.
The transaction securitizes a portfolio of primarily senior-secured leveraged loans and bonds, and is managed by Rockford Tower Capital Management LLC.
S&P Global Ratings' document review score
To help assess the relative strength of documentation across European CLO transactions, the S&P Global Ratings' document review score focuses on 15 CLO document parameters that, in our view, may affect CLO performance.
Each component score provides an assessment of how conservative the parameter is using predefined terms (see "Appendix"). The scores range from 1 (more conservative) to 3 (less conservative). The scores for this transaction are shown in the chart below.
Environmental, social, and governance factors
We regard the exposure to environmental, social, and governance (ESG) credit factors in the transaction as being broadly in line with our benchmark for the sector (see "ESG Industry Report Card: Collateralized Loan Obligations," March 31, 2021). Primarily due to the diversity of the assets within CLOs, the exposure to environmental credit factors is viewed as below average, social credit factors are below average, and governance credit factors are average. For this transaction, the documents prohibit assets from being related to certain activities, including, but not limited to the following: controversial weapons, pornography or prostitution, and tobacco or tobacco products. Accordingly, since the exclusion of assets from these industries does not result in material differences between the transaction and our ESG benchmark for the sector, we have not made any specific adjustments in our rating analysis to account for any ESG-related risks or opportunities.
Appendix
The tables below define our assessment of how conservative a parameter is and the corresponding scores. Where the language in the documentation does not fit perfectly into one of the three categories, set out below, we have used analytical judgment to determine the most suitable category.
| Risky credits | |
|---|---|
| Score | Component: considers key factors that may impact the credit risk of the portfolio |
| Non-senior-secured bucket | |
| 1 | Less than 10% non-senior-secured |
| 2 | Max 10% non-senior-secured |
| 3 | More than 10% non-senior-secured |
| Credit estimate limitation | |
| 1 | Credit estimates are limited by a threshold that is lower than 10% |
| 2 | Credit estimates limited to 10% |
| 3 | No bucket or credit estimates are limited to more than 10% |
| Discount obligation thresholds | |
| 1 | The loan and/or bond purchase thresholds are above 80% and/or 75% of the principal balance |
| 2 | Loans purchased below 80% and bonds purchased below 75% will be considered as discount obligations |
| 3 | The discount purchase threshold is the lower of 80%/75% of the principal balance and the price of an eligible index |
| Minimum indebtedness of obligor | |
| 1 | Obligors with a total current indebtedness of less than €200 million are not eligible |
| 2 | Obligors with a total current indebtedness of between €150 million and €200 million are eligible |
| 3 | Obligors with a total current indebtedness of less than €150 million are eligible |
| Minimum purchase price under eligibility criteria | |
| 1 | The minimum purchase price is higher than 60% of the principal balance |
| 2 | The minimum purchase price is 60% of the principal balance |
| 3 | No minimum or minimum purchase price is lower than 60% of the principal balance |
| Par leakage and use of interest intra-period | ||||
|---|---|---|---|---|
| Score | Component: considers key features that allow for principal proceeds to be recharacterized as interest, and any instances where interest proceeds may be used intra-period (and thereby not flowing in priority through the CLO waterfall on IPDs) | |||
| Trading gains | ||||
| 1 | Trading gains are not permitted, other than to avoid failing risk retention requirements | |||
| 2 | Trading gains are permitted, provided that gains are the greater of the purchase price and principal balance | |||
| 3 | Trading gains are permitted, provided that gains are above the purchase price or a defined percentage | |||
| Post effective date par flush | ||||
| 1 | Subject to (i) reinvestment/target par and (ii) satisfying collateral quality and portfolio profile tests | |||
| 2 | Subject to (i) reinvestment/target par and (ii) satisfying at least one additional maintenance condition | |||
| 3 | Subject to reinvestment/target par | |||
| Workout obligations: use of principal | ||||
| 1 | Purchase of principal-funded workout obligations permitted, provided that a target par condition is satisfied | |||
| 2 | Purchase of principal-funded workout obligations permitted, provided that all par value tests are satisfied | |||
| 3 | Purchase of principal-funded workout obligations permitted, provided that only senior par value tests are satisfied | |||
| Workout obligations: principal leakage | ||||
| 1 | Not permitted: all proceeds from principal-funded workout obligations flow to the principal account | |||
| 2 | Principal-funded workout obligations may be leaked to interest, subject to amounts being in excess of the carrying value in CLO par value tests | |||
| 3 | Principal-funded workouts may leak to interest, provided that a target par condition is satisfied | |||
| Use of interest intra-period (other than for workouts) | ||||
| 1 | Use of interest intra-period is permitted, but limited to any reasonable costs and payments | |||
| 2 | Use of interest intra-period is permitted, including any costs relating to bankruptcy exchange and/or distressed obligations that are in addition to reasonable and customary transfer costs | |||
| 3 | Use of interest intra-period is permitted, for any costs in addition to 1 and 2 above | |||
| IPDs--Interest payment dates. | ||||
| Duration risk | ||||
|---|---|---|---|---|
| Score | Component: considers key factors that may extend the maturity of the underlying assets in the portfolio | |||
| Maturity amendment provisions | ||||
| 1 | The manager must vote against a maturity amendment if they cannot vote in favor | |||
| 2 | The manager can vote for a maturity amendment if the WAL test is satisfied, if not, subject to a 5% bucket and not being long-dated | |||
| 3 | The manager can vote in favor of a maturity amendment even if the WAL test is not satisfied (above a 5% allowance) or it results in a long-dated obligation, in both cases subject to haircuts and conditions | |||
| Weighted-average life modification | ||||
| 1 | The WAL test may not be modified | |||
| 2 | The WAL test may be extended, subject to investor consent | |||
| 3 | A WAL test step-up condition is permitted, subject to conditions | |||
| Post reinvestment period: weighted-average life test | ||||
| 1 | The WAL test must be satisfied | |||
| 2 | A one-touch WAL requirement to satisfy or maintain or improve dependent on the WAL test on the last day of the reinvestment period | |||
| 3 | No WAL test condition specified | |||
| Post reinvestment period: maturity matching or SDRs | ||||
| 1 | Same or shorter maturity and same or better rating | |||
| 2 | Same or shorter maturity and an SDR requirement | |||
| 3 | Only SDR requirement | |||
| Post reinvestment period: coverage test calculation | ||||
| 1 | Coverage tests must be satisfied before and after | |||
| 2 | Coverage tests must be satisfied after | |||
| 3 | Coverage tests satisfied on an aggregated basis | |||
| WAL--Weighted-average life. SDR--Scenario default rate. | ||||
Related Criteria
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- Criteria | Structured Finance | General: Global Framework For Payment Structure And Cash Flow Analysis Of Structured Finance Securities, Dec. 22, 2020
- Criteria | Structured Finance | General: Methodology To Derive Stressed Interest Rates In Structured Finance, Oct. 18, 2019
- Criteria | Structured Finance | CDOs: Global Methodology And Assumptions For CLOs And Corporate CDOs, June 21, 2019
- Criteria | Structured Finance | General: Counterparty Risk Framework: Methodology And Assumptions, March 8, 2019
- Criteria | Structured Finance | General: Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions, Jan. 30, 2019
- Legal Criteria: Structured Finance: Asset Isolation And Special-Purpose Entity Methodology, March 29, 2017
- Criteria | Structured Finance | General: Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014
- Criteria | Structured Finance | General: Global Derivative Agreement Criteria, June 24, 2013
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Global Investment Criteria For Temporary Investments In Transaction Accounts, May 31, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Weekly European CLO Update, April 2, 2024
- CLO Pulse Q2 2023: The "Snooze Drag" Takes Hold In Europe, Sept. 28, 2023
- European Secured Debt Recovery Estimates Q1 2023: Refinancing Is Fueling Issuance, Recoveries Stable, July 13, 2023
- Credit Conditions Europe Q3 2023: The Slow Burn of Rising (Real) Rates, June 27, 2023
- Resilience Under Pressure Amid Tighter Financial Conditions, Sept. 26, 2023
- Leveraged Finance: A 10-Year Lookback At Actual Recoveries And Recovery Ratings, Feb. 4, 2019
- 2017 EMEA Structured Credit Scenario And Sensitivity Analysis, July 6, 2017
- Global Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
- European Structured Finance Scenario And Sensitivity Analysis 2016: The Effects Of The Top Five Macroeconomic Factors, Dec. 16, 2016
| Primary Credit Analyst: | Rebecca Mun, London + 44 20 7176 3613; rebecca.mun@spglobal.com |
| Secondary Contact: | Emanuele Tamburrano, London + 44 20 7176 3825; emanuele.tamburrano@spglobal.com |
| Research Contributor: | Tejas Parab, CRISIL Global Analytical Center, an S&P affiliate, Mumbai |
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