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Signal Harmonic CLO II DAC European Cash Flow Notes Assigned Ratings
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Signal Harmonic CLO II DAC European Cash Flow Notes Assigned Ratings

Ratings
Class Rating* Amount (mil. €) Subordination (%) Interest rate§
A AAA (sf) 272.80 38.00 Three/six-month EURIBOR plus 1.70%
B-1 AA (sf) 43.56 27.00 Three/six-month EURIBOR plus 2.60%
B-2 AA (sf) 4.84 27.00 5.75%
C A (sf) 26.40 21.00 Three/six-month EURIBOR plus 3.40%
D BBB- (sf) 28.60 14.50 Three/six-month EURIBOR plus 4.70%
E BB- (sf) 19.80 10.00 Three/six-month EURIBOR plus 6.93%
F B- (sf) 13.20 7.00 Three/six-month EURIBOR plus 8.39%
Sub NR 40.80 N/A N/A
*The ratings assigned to the class A, B-1, and B-2 notes address timely interest and ultimate principal payments. The ratings assigned to the class C, D, E, and F notes address ultimate interest and principal payments. §The payment frequency switches to semiannual and the index switches to six-month EURIBOR when a frequency switch event occurs. EURIBOR--Euro Interbank Offered Rate. NR--Not rated. N/A--Not applicable.

Overview

  • We assigned ratings to Signal Harmonic CLO II DAC's European cash flow CLO notes.
  • The transaction securitizes a pool of primarily syndicated senior secured loans and bonds and is managed by Signal Harmonic Ltd.
  • The ratings reflect our view of the transaction's diversified collateral pool, credit enhancement, and legal structure, among other factors.

LONDON (S&P Global Ratings) April 5, 2024--S&P Global Ratings today assigned its credit ratings to Signal Harmonic CLO II DAC's class A, B-1, B-2, C, D, E, and F notes. At closing, the issuer also issued unrated subordinated notes (see list above).

The reinvestment period will be 4.53 years, while the non-call period will be 2.00 years after closing.

Under the transaction documents, the rated loans and notes will pay quarterly interest unless there is a frequency switch event. Following this, the notes will switch to semiannual payment.

The ratings assigned to the notes 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 are in line with our counterparty rating framework.

Portfolio benchmarks
Current
S&P Global Ratings weighted-average rating factor 2,861.57
Default rate dispersion 480.76
Weighted-average life (years) 4.81
Obligor diversity measure 97.23
Industry diversity measure 22.41
Regional diversity measure 1.26

Transaction key metrics
Current
Total par amount (mil. €) 440.00
Defaulted assets (mil. €) 0.00
Number of performing obligors 111
Portfolio weighted-average rating derived from our CDO evaluator B
'CCC' category rated assets (%) 0.90
Actual 'AAA' weighted-average recovery (%) 37.81
Actual weighted-average spread (%) 4.37
Actual weighted-average coupon (%) N/A
N/A--Not applicable.

Our ratings reflect our assessment of the collateral portfolio's credit quality, which has a weighted-average rating of 'B'. The portfolio is well-diversified on the closing date, primarily comprising broadly syndicated speculative-grade senior secured term loans and senior secured bonds. Therefore, we 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 also modeled the covenanted weighted-average spread of 4.25%, and the covenanted weighted-average recovery rates 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.

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).

Following the application of our structured finance sovereign risk criteria, we consider the transaction's exposure to country risk to be limited at the assigned ratings, as the exposure to individual sovereigns does not exceed the diversification thresholds outlined in our criteria (see "Incorporating Sovereign Risk In Rating Structured Finance Securities: Methodology And Assumptions," published on Jan. 30, 2019).

The transaction's legal structure and framework is bankruptcy remote. The issuer is a special-purpose entity that meets our criteria for bankruptcy remoteness (see "Related Criteria").

Our credit and cash flow analysis indicates that the available credit enhancement for the class B-1 to E 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 the effective date, during which the transaction's credit risk profile could deteriorate, we have capped our ratings assigned to the notes. The class A and F notes can withstand stresses commensurate with the assigned ratings.

In our view, the portfolio is granular in nature, and well-diversified across obligors, industries, and asset characteristics when compared with other CLO transactions we have rated recently. As such, we have not applied any additional scenario and sensitivity analysis when assigning our ratings to any classes of notes in this transaction.

Following our analysis of the credit, cash flow, counterparty, operational, and legal risks, we believe that our ratings are commensurate with the available credit enhancement for the class A to F notes.

In addition to our standard analysis, we have also included the sensitivity of the ratings on the class A to E notes, based on four hypothetical scenarios (see chart below).

image

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 notes.

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.

image

Signal Harmonic CLO II DAC is a European cash flow CLO securitization of a revolving pool, comprising euro-denominated senior secured loans and bonds issued mainly by speculative-grade borrowers. Signal Harmonic Ltd. manages the transaction.

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

Related Research

Primary Credit Analyst:Sandeep Chana, London + 44 20 7176 3923;
sandeep.chana@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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