--Series 2006-1 senior secured revolving notes due 2016, up to
--Series 2006-2 senior secured term notes due 2016, up to
--Series 2006-3 senior secured delayed funding notes due 2016, up to
--Series 2006-4 senior secured delayed funding notes due 2016 up to
--Series 2007-1 senior secured revolving notes due 2016 up to
--Series 2007-2 senior secured delayed funding notes due 2016 up to
--Series 2007-3 senior secured delayed funding notes due 2016, up to
Stone Tower is a special purpose vehicle created in 2006 with limited liability under the laws of the
The rating reflects the structural protections to note holders provided by the note indenture and other legal documents including: maintenance of covenanted overcollateralization (OC) tests, restrictions on portfolio concentration, and mandatory deleveraging or portfolio de-risking if there is a breach in the OC tests. The rating also reflects the current levels of OC, performance of the structure since inception, and the capabilities of Apollo as investment manager.
KEY RATING DRIVERS
-- Sufficient asset coverage at the assigned rating level relative to Fitch's published criteria;
-- The structural protections afforded by mandatory de-risking and de-leveraging provisions in the event of OC declines;
-- The legal and regulatory parameters that govern the Stone Tower's operations;
-- The capabilities of Apollo as the investment manager.
The terms of the notes require that OC be maintained above a minimum threshold. OC is calculated as a ratio of market value of assets haircut by prescribed advance rates to the outstanding notional amount of notes. The advanced market value of assets also reflects the issuer and industry diversification of the portfolio. OC is tested on a daily basis and Stone Tower is in compliance with the requirement when the advanced amount of market value is greater than the notional amount of notes (i.e. tested with OC tests).
Should the OC test decline below the minimum threshold amounts, the fund manager must cure the breach by altering the composition of the portfolio toward assets with higher advance rates, or by reducing leverage in a sufficient amount. A breach must be cured within 10 business days, if not the manager must formulate and deliver a plan to cure the breach to the trustee and execute the plan within an additional 10 business days. A continuing breach of the OC test constitutes an event of default which provides the Trustee with certain duties including the liquidation of assets to redeem the notes. Fitch estimates that the maximum exposure period that noteholders face to market value risk is up to 21 business days.
The provisions of the OC tests (including advance rates, diversification requirements, exposure period and eligible investments) were consistent with the guidelines described in Fitch's closed-end fund criteria at the 'BBB' rating level.
Fitch performed various stress tests on Stone Tower's current portfolio to assess the strength of the structural protections of the notes. These tests included determining various 'worst case' scenarios where Stone Tower's portfolio composition migrated to assets where the advance rates prescribed in the transaction documents are less conservative than those outlined by Fitch's criteria and the portfolio became more concentrated by industry.
For example, the current portfolio composition was stressed by increasing investments in mezzanine collateralized loan obligation notes, while simultaneously migrating the portfolio to loans of lower credit quality. The results of the stress tests indicate the structural protections of the notes at the 'BBB' rating level provide for operational cushion as portfolio composition would need to change significantly outside the historical composition before the credit quality of the notes would deteriorate below this rating level.
Fitch views the current liquidity of the portfolio sufficient to meet future commitments from loan investments, which are currently only partially funded, and to meet note interest payments.
Apollo was established in 1990. As of
Fitch will monitor the transaction regularly and as warranted by events. Events that may trigger a review include, but are not limited to, the following:
--Significant changes to portfolio composition;
--Breach in any OC test; and
--Future changes to Fitch's rating criteria.
Surveillance analysis is conducted on the basis of the then-current portfolio of assets. Fitch's goal is to ensure that the assigned ratings remain an appropriate reflection of the issued notes' credit risk.
The ratings may be sensitive to material changes in the credit quality or market risk profiles of the funds. The rating reflects the latitude of the manager to change portfolio allocations over time; however, significant changes to the investment strategy or portfolio composition, such as shifts to much lower credit quality or much greater allocations to lower rated CLO notes, could have negative rating implications.
The notes have a stated maturity of
A material adverse deviation from Fitch guidelines for any key rating driver could cause the rating to be lowered by Fitch. For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.
For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.
To receive Fitch's forthcoming research on closed-end funds please go to:
Additional information is available at 'www.fitchratings.com'.
The sources of information used to assess this rating were the public domain and Stone Tower.
--'Rating Market Value Structures' (
--'Rating Closed-End Fund Debt and Preferred Stock' (
Rating Market Value Structures
Rating Closed-End Fund Debt and Preferred Stock
Source: Fitch Ratings
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