Buoyed by a portfolio of senior secured loans with high weighted average recovery rates, positive cashflow metrics, and a solid portfolio composition, the Ares LXVI CLO is proceeding with a $403 million transaction.
Ares CLO Management will manage the arbitrage cash flow collateralized loan obligation (CLO), with J.P. Morgan Securities acting as arranger, according to Fitch Ratings. Almost all of the assets, 95.0% are floating-rate, and all of the note liabilities reference the Secured Overnight Financing Rate (SOFR).
In terms of composition and credit quality, the Ares LXVI has several strong aspects. The three largest industries might constitute up to 39.0% of the portfolio balance in aggregate, while the portfolio is more diversified by obligors. The top five obligors in the pool represent up to 12.5% of the portfolio balance in aggregate.
In terms of credit, the underlying secured loans have an indicative weighted average recovery rate of 76.1%, according to Fitch.
The notes have a July 2034 maturity date, and the senior ‘AAA’ piece has a spread of 210 basis points over the benchmarks. The senior ‘AAA’ notes will benefit from a credit enhancement level of 36.0%, the rating agency said.
Aside from the deal’s positive attributes, Fitch noted certain macro or sector risks. Corporate borrowers with weaker credit are more exposed to some of the prevailing forces at work in the economy, such as higher inflation and borrowing costs, and the higher oil prices globally.
Fitch expects to assign ‘AA’ ratings to the $31 million, class B notes, which are expected to price at SOFR + 3.15%, and ‘A’ rating to the $24.6 million, class C notes. After that, Fitch expects to assign ratings of ‘BBB+’ on the class D-1 notes through ‘BB-’ on the class E notes.
Fitch did not offer ratings on the A-1a through A-2 notes, but the rating agency did point out that A-1a through A-1c enjoy a 36% credit enhancement level, while A-2 has a 33.5% credit enhancement.
