Fitch Revamps U.S. Middle Market CLO Criteria As Structure Continues to Evolve

Business Wire, May 17, 2005

NEW YORK -- As issuance and volume for middle market collateralized loan obligations continues to rise, so does the amount of structural enhancements to this increasingly popular asset class. These developments, coupled with the advent of VECTOR, has prompted Fitch Ratings to update its U.S. middle market CLO methodology.

'Many middle market CLOs of late have been utilizing a pro-rata pay structure where all the notes in the capital structure receive principal amortization based on their percentage of the entire structure prior to any rating triggers,' said Alla Zaydman, Director, Fitch Ratings. 'As a result, Fitch's updated criteria includes analysis of the deal structure's contemplated pro rata pay amortization, along with CRS and credit assessment of individual loans to asses the collateral pool. These mechanisms and triggers are then stress tested to ensure that the notes are adequately protected, as per the governing documents, should any of the sequential pay events occur.'

Fitch has also observed middle market CLOs gradually migrate to a more managed pool structure from its static originations, along with more use of a ramp-up, replenishment period and over-collateralization and interest coverage tests. In observance of these new innovations, Fitch utilizes its cash flow CDO model, along with VECTOR outputs such as default timing, default hurdles and recovery rates, to determine whether various classes of CDO liabilities pay in full in accordance with the terms of the transaction.

Fitch expects the high lending volume to continue through 2005 and anticipates more middle market CLOs as issuers continue to need financing and investor comfort grows in this asset class. 'Criteria for U.S. Middle Market Collateralized Loan Obligations' is available on the Fitch Ratings web site at 'www.fitchratings.com'.