Fitch Ratings has affirmed the class A-1A, A-1B, and A-1C notes issued by KKR Financial CLO 2013-2 Ltd. (KKR 2013-2) at 'AAAsf'. The Rating Outlook remains Stable.
KEY RATING DRIVERS
The affirmations are based on the stable performance of the underlying portfolio since the transaction closed in January 2014 and the stable credit enhancement available to the notes. As of the Dec. 5, 2014 trustee report, the transaction continues to pass all of its coverage tests and collateral quality tests, and there are no defaults in the underlying portfolio.
The loan portfolio par amount plus principal cash is approximately $371.4 million, compared to the effective date target balance of $369 million. The minimum weighted average spread (WAS) trigger is 3.5 %, versus a current WAS of 4.8%, as reported by the trustee. Additionally, the weighted average rating factor of 'B' slightly improved from 'B/B-' level at closing. Fitch considers 0.2% of the collateral assets to be rated in the 'CCC' category versus 5.2% in the indicative portfolio at closing, based on Fitch's Issuer Default Rating (IDR) Equivalency Map. Currently, 93.1% of the portfolio has strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher.
The Stable Outlook reflects the expectation that the class A-1A, A-1B, and A-1C notes have a sufficient level of credit protection to withstand potential deterioration in the credit quality of the portfolio, based on the results of the Fitch sensitivity analysis described below.
RATING SENSITIVITIES
The ratings of the notes may be sensitive to the following: asset defaults, portfolio migration, including assets being downgraded to 'CCC', portions of the portfolio being placed on Rating Watch Negative, overcollateralization (OC) or interest coverage (IC) test breaches, or breach of concentration limitations or portfolio quality covenants. Fitch conducted rating sensitivity analysis on the closing date of KKR 2013-2, incorporating increased levels of defaults and reduced levels of recovery rates, among other sensitivities.
KKR Financial CLO 2013-2, Ltd. (the issuer) and KKR Financial CLO 2013-2, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that is managed by KKR Financial Advisors II, LLC, a wholly-owned subsidiary of KKR Asset Management LLC (KAM). Net proceeds from the issuance of the secured and subordinated notes were used to purchase a portfolio of primarily senior secured leveraged loans. The CLO has a four-year reinvestment period, scheduled to end in January 2018.
This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. Given the stable performance of the deal since closing in January 2014, no updated cash flow modeling was completed. The current portfolio's 'AAAsf' Rating Default Rate (RDR) and Rating Recovery Rate (RRR) outputs from PCM are 52.2% and 40.2%, respectively, versus an RDR of 53.6% and RRR of 39.7% for the indicative portfolio at closing.
Initial Key Rating Drivers and Rating Sensitivity are further described in the New Issue Report published on January 23, 2014. A comparison of the transaction's Representations, Warranties, and Enforcement Mechanisms (RW&Es) to those of typical RW&Es for that asset class is also available by accessing the reports and links indicated below.
Fitch has affirmed the following ratings:
--$100,000,000 class A-1A notes 'AAAsf'; Outlook Stable;
--$10,000,000 class A-1B notes 'AAAsf'; Outlook Stable;
--$115,000,000 class A-1C notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class A-2A, A-2B, B, C, D, or Subordinated Notes.
Additional information is available at 'www.fitchratings.com'.
The information used to assess these ratings was sourced from periodic servicer reports, note valuation reports, and the public domain.
Applicable Criteria & Related Research:
--'Global Structured Finance Rating Criteria' (August 4, 2014);
--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);
--'KKR Financial CLO 2013-2, Ltd./LLC New Issue Report' (Jan. 23, 2014).
Applicable Criteria and Related Research:
KKR Financial CLO 2013-2, Ltd./LLC
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=730196
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Global Rating Criteria for Corporate CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057
Global Structured Finance & Covered Bonds Rating Criteria Hierarchy
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754431
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=969035
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