NEW YORK–(BUSINESS WIRE)–Fitch Ratings affirms the following notes issued by Madison Arbor
Limited (Madison Arbor) at ‘AAA’:
–Series A, senior notes with a maturity of Dec. 17, 2018.
Madison Arbor is a special purpose trust established by BNP Paribas
(BNPP) that purchases participations in collateralized loans made to
regulated U.S. and Canadian closed-end funds (CEFs).
KEY RATING DRIVERS
— High credit quality of underlying loans supported by margin policies
including margin haircuts, minimum diversification standards, and asset
— While new loan participations may be added during the first four
years (the revolving period), under the Indenture these are subject to a
prior review by Fitch (Rating Agency Condition).
— Short exposure to market value risk at the underlying loan level if a
CEF defaults under the terms of each credit agreement. Each underlying
loan is secured by assets in a segregated account in which BNPP has a
perfected security interest and can liquidate over a short period of
time (assumed seven business days maximum) in event of CEF default.
— Structural protections in the form of over-collateralization (OC) and
interest coverage (IC) tests, each set at 105%.
— Regulatory constraints on CEF leverage by 1940 Investment Act’s
provisions and/or similar prospectus guidelines which create incentives
to keep senior leverage below 33% of total assets.
— Structural provisions such as transaction wind-down provisions if
BNPP is materially downgraded and incentives for borrowers to prepay the
loans if BNPP undergoes material credit deterioration.
— Alignment of interests due to 5% subordination in the form of equity
participations that will be held by BNPP.
— Capabilities of BNPP and Affiliates as Originator of the underlying
loans to effectively manage margin policies and perform duties as
— Fitch’s Country Ceiling for Ireland is ‘AAA’.
ANALYSIS OF MARGIN POLICIES
Fitch reviewed the terms of the credit agreement of each underlying loan
and compared the haircuts, minimum diversification, and asset
eligibility to the market value risk methodology in Fitch’s criteria
report ‘Rating Closed-End Debt and Preferred Stock’. Each segregated
account was also tested for sufficiency of asset coverage at the rating
level assigned to the notes using Fitch OC tests.
In addition to loan specific covenants, performance of the
participations also benefits from the baseline protections of the 1940s
Act (or similar prospectus guidelines) that keep senior borrowings below
33% at the time of issuance and during a normal operating environment.
These baseline protections help leverage levels stay low and therefore
help keep a significant amount of unencumbered assets available for the
fund to post as margin in a market-value stress.
For the common equity asset class, including equity by master limited
partnerships (MLPs), Fitch evaluated the margin policies using
market-value stresses that reflected the shorter exposure period of the
transaction. In this case, Fitch analyzed the shortened exposure period
and concluded it would reduce market risk while not increasing liquidity
risk substantially. For all fixed income asset classes, Fitch evaluated
the margin policies using the discount factors in the CEF Criteria,
which assume an exposure period of 45 business days versus the shorter
anticipated exposure period of seven days for this transaction.
Fitch reviewed the legal structure of the transaction and found it met
Fitch’s applicable rating criteria. Two key structural elements of the
transaction are wind-down triggers based on the rating of BNPP (set at
below ‘BBB’ and ‘F2’) and IC and OC tests. The IC test compares the
interest from the participations minus amounts payable to the interest
required to be paid on the notes. The OC test compares the principal
balance of the loan participations plus trust deposits to the aggregate
amount outstanding on the notes. To pass, both tests need to be greater
than 105%. If either test is failing, the trust cannot issue new notes
and the trust cannot make equity distributions.
BNPP is the loan originator and servicer. Since 2008 BNPP has provided
margin financing to 1940s Act funds. BNPP, through the New York Branch,
is servicer of the loan participations. The trustee is US Bank National
Association (rated ‘AA-/F1+’).
Fitch will monitor the transaction regularly and as warranted by events
with a review. Events that may trigger a review include, but are not
limited to, the following:
–Any changes to the portfolio of loan participations;
–Downgrade of BNPP to below ‘BBB’ and ‘F2’;
–OC or IC test breach;
–Future changes to Fitch’s rating criteria.
The indenture requires that prior to any changes to the portfolio of
loan participations, the trust must ensure that a change would not
result in a change in the rating assigned to the notes.
Surveillance analysis is conducted on the basis of the then-current
portfolio of loan participations. Fitch’s goal is to ensure that the
assigned ratings remain an appropriate reflection of the issued notes’
Fitch performed stress scenarios to assess the transaction’s structural
protections ability to mitigate market value risk consistent with an
‘AAA’ rating. Due to the terms of the margin policies, expected
unencumbered assets at each fund and equity subordination at the SPV
these scenarios had minimal rating impact.
Additionally, ratings assigned to the notes may be sensitive to material
changes in the leverage, portfolio credit quality or market risk of the
underlying funds. The ratings may also be sensitive to a downgrade of
BNPP to below ‘BBB’ and ‘F2’, or significant breaches to the OC or IC
tests. A material adverse deviation from Fitch guidelines for any key
rating driver could cause ratings to be lowered by Fitch.
For additional information about Fitch rating guidelines applicable to
debt and preferred stock issued by closed-end funds, please review the
criteria referenced below, which can be found on Fitch’s web site at ‘www.fitchratings.com‘.
Additional information is available at ‘www.fitchratings.com‘.
The sources of information used to assess this rating were the public
domain and BNPP.
Opt-in to receive Fitch’s forthcoming research on closed-end funds:
–‘Rating Closed-End Fund Debt and Preferred Stock’ (Sep. 16, 2015);
–‘Counterparty Criteria for Structured Finance and Covered Bonds’ (May
–‘Country Ceilings’ (Aug. 20, 2015).
Rating Closed-End Fund Debt and Preferred Stock (pub. 16 Sep 2015)
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Fitch Ratings, Inc.
New York, NY, 10004
Alastair Sewell, CFA
Hannah James, + 1