Fitch Upgrades One Class of Sargas CLO II Ltd./LLC
CHICAGO -- November 08, 2012
Fitch Ratings has upgraded one class of notes issued by Sargas CLO II Ltd./LLC
(Sargas CLO II) as follows:
--$11,684,663 class E notes to 'Asf' from 'BBsf'; Outlook Stable.
The upgrade reflects the significant amortization and stable performance of
the underlying loan portfolio that has occurred since Fitch's last rating
action in December 2011 while accounting for the highly concentrated and
relatively low-rated nature of the remaining portfolio.
The underlying loan portfolio has continued to amortize since Fitch's last
rating action without experiencing significant deterioration. Only one of the
remaining obligors has been downgraded over this time, to 'CC' from 'CCC',
while no additional defaults have occurred. Fitch considers the average credit
quality of the portfolio to remain in the 'B-/CCC+' range. The class C and
class D notes, which together had approximately $21.7 million of par
outstanding at Fitch's last review, have since been paid in full. The class E
notes now represent the senior-most class of notes and received approximately
$7.5 million of principal in addition to their ordinary interest and an
accrued payable of almost $139 thousand at the Oct. 22, 2012 payment date. The
class E notes now benefit from an increased degree of credit enhancement as a
result of the amortization of the capital structure.
As of the Oct. 5, 2012 trustee report, Fitch considers the performing loan
portfolio to consist of approximately $40.1 million of par from nine unique
obligors generally rated in the 'CCC' and 'B' rating categories. In order to
account for the portfolio's concentration risk, Fitch modeled the transaction
using the Obligor Concentration Uplift (OCU) feature in its Portfolio Credit
Model (PCM) as the base case scenario. The default and recovery level outputs
from PCM were then utilized in Fitch's cash flow model under various default
timing and interest rate stress scenarios, as described in the report 'Global
Criteria for Cash Flow Analysis in CDOs'. While Fitch's cash flow analysis
indicated higher passing rating levels for the class E notes, the extent of
the upgrade captures the improvement in credit enhancement while accounting
for the obligor concentration risk in the remaining portfolio. In accordance
with its 'Criteria for Rating Caps in Global Structured Finance Transactions',
Fitch is capping the rating at 'Asf' due to the degree of obligor
concentration in the underlying portfolio.
Sargas CLO II is a collateralized debt obligation (CDO) that closed on Aug.
16, 2006 and was originally named De Meer Middle Market CLO 2006-1 Ltd./LLC.
Fortress Investment Group purchased the management contract for the
transaction from Pangaea Asset Management in December 2010. The transaction's
substitution period ended in March 2009. According to the most recent trustee
report the underlying loan portfolio consists of 52.9% broadly syndicated
loans and 47.1% middle market loans.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
The information used to assess these ratings was sourced from the asset
manager, periodic servicer reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions' (Aug.
--'Global Rating Criteria for Corporate CDOs' (Aug. 08, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions'
(March 20, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Criteria for Rating Caps in Global Structured Finance Transactions
Global Rating Criteria for Corporate CDOs
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions
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Primary Surveillance Analyst
70 West Madison Street
Chicago, IL 60602
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