Fitch Rates Vibrant CLO X, Ltd; Issues New Issue Report.
--$320,000,000 class A-1 notes 'AAAsf'; Outlook Stable.
Fitch does not rate the class A-2, B-1, B-2, C, and D notes or the subordinated notes.
Vibrant CLO X, Ltd. (the issuer) is an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by DFG Investment Advisers, Inc. (DFG). Net proceeds from the issuance of the secured notes and subordinated notes will be used to purchase a $500 million portfolio of primarily first lien, senior secured loans. The CLO will have an approximately five-year reinvestment period and a two-year noncall period.
KEY RATING DRIVERS
Sufficient Credit Enhancement: Credit enhancement (CE) of 36.0% for class A-1 notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in a 'AAAsf' stress scenario. The degree of CE available to class A-1 notes is below the average CE of recent 'AAAsf' CLO issuances; however, cash flow modeling indicates performance in line with other Fitch-rated 'AAAsf' notes.
'B+'/'B' Asset Quality: The average credit quality of the indicative portfolio is approximately 'B+'/'B', which is comparable to that of recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class A-1 notes are unlikely to be affected by the foreseeable level of defaults. Class A-1 notes are projected to be able to withstand default rates of up to 60.4%.
Strong Recovery Expectations: The indicative portfolio consists of 99.6% first lien, senior secured loans and 0.4% second lien loans. Approximately 95.2% of the indicative portfolio has strong recovery prospects or a Fitch-assigned recovery rating of 'RR2' or higher, resulting in a base case recovery assumption of 80.9%. In determining the class A-1 notes' ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses, resulting in a 38.2% recovery rate in Fitch's 'AAAsf' scenario.
Fitch evaluated the notes' sensitivity to the potential variability of key model assumptions, including decreases in recovery rates and increases in default rates. Results under these sensitivity scenarios ranged between 'BB+sf' and 'AAAsf' for the class A-1 notes.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
The majority of the underlying assets or risk-presenting entities have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority-registered rating agencies. Fitch has relied on the practices of the relevant groups within Fitch and/or other rating agencies to assess the asset portfolio information.
Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis.
--Loan-by-loan data provided by the arranger at Sept. 19, 2018;
--Transaction documents provided by the arranger at Sept. 24, 2018.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and that relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. Offering documents for U.S. CLO transactions do not typically include RW&Es that are available to investors and that relate to the asset pool underlying the security. However, the offering document of this transaction refinancing included a draft of the supplemental indenture as a supplemental exhibit, which contains RW&Es related to the underlying asset pool of the CLO. For further information, please see Fitch's Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated May 31, 2016.