News Column

Fitch Publishes Stone Tower Credit Funding I Ltd. 'BBB(sf)'

June 10, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings publishes the following senior secured notes (notes) issued by Stone Tower Credit Funding I Ltd. (Stone Tower) at 'BBB(sf)':

--Series 2006-1 senior secured revolving notes due 2016, up to $250,000,000;

--Series 2006-2 senior secured term notes due 2016, up to $250,000,000;

--Series 2006-3 senior secured delayed funding notes due 2016, up to $250,000,000;

--Series 2006-4 senior secured delayed funding notes due 2016 up to $500,000,000;

--Series 2007-1 senior secured revolving notes due 2016 up to $500,000,000;

--Series 2007-2 senior secured delayed funding notes due 2016 up to $425,000,000;

--Series 2007-3 senior secured delayed funding notes due 2016, up to $75,000,000.

Stone Tower is a special purpose vehicle created in 2006 with limited liability under the laws of the Cayman Islands to acquire investments through issuing notes and equity. Apollo Credit Management, LLC (Apollo) is the investment manager and responsible for day-to-day operations of Stone Tower including managing the portfolio of investments, managing compliance with indenture requirements and generally setting and executing investment and leverage strategies.

RATING RATIONALE

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.

LEVERAGE

As of April 30, 2014, Stone Tower had total assets of approximately $3.7 billion and outstanding leverage of $2.2 billion or 60% of assets. The notes consist of $50 million of revolving notes, and $2.2 billion of term notes. The notes are all pari-passu and issued under the terms of the same indenture. All series share in the same collateral and voting rights. Stated maturity on current notes is June 25, 2016, which can be extended for up to five years if certain conditions are met. See rating sensitivity section for Fitch's analysis of rollover risk.

STRUCTURAL PROTECTIONS

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.

OVERCOLLATERALIZATION

As of April 30, OC coverage as calculated in accordance with the Fitch total and net OC tests (Fitch OC tests) per the 'BBB' rating guidelines outlined in Fitch's closed-end fund criteria, were in excess of 100%. Stone Tower was also passing its existing covenanted OC Tests.

STRESS TESTS

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.

PORTFOLIO PROFILE

As of April 30, 2014 the portfolio was comprised primarily of senior secured bank loans (approximately 80%) and high yield bonds (approximately 8%), with the balance in cash, CLO notes and common equity. The largest exposures were to the Fitch industries Computers and Electronics, Telecommunications; Healthcare; and Banking, Finance and Insurance.

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.

THE ADVISOR

Apollo was established in 1990. As of March 31, 2014, Apollo had 761 employees, including 302 investment professionals, and $159 billion in assets under management. The U.S. Performing Credit Group has 26 investment professionals and manages $23.5 billion across various products. The group's portfolio includes 20 CLOs, which makes Apollo one of the largest CLO managers by assets under management.

PERFORMANCE ANALYTICS

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.

RATING SENSITIVITIES

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 June 25, 2016. Fitch will review how the manager prepares for the maturity, by building liquidity, extending the notes or replacing through different funding. If the portfolio has little liquidity and general liquidity in the secondary market is lower due to market conditions within six months to maturity this may lead to negative rating pressure.

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:

http://forms.fitchratings.com/forms/FAMCEFOptinform

Additional information is available at 'www.fitchratings.com'.

The sources of information used to assess this rating were the public domain and Stone Tower.

Applicable Criteria and Related Research:

--'Rating Market Value Structures' (Aug. 14, 2013);

--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 14, 2013).

Applicable Criteria and Related Research:

Rating Market Value Structures

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716222

Rating Closed-End Fund Debt and Preferred Stock

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=716220

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833941

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Ian Rasmussen

Senior Director

+1-212-908-0232

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Yuriy Layvand, CFA

Director

+1-212-908-9191

or

Committee Chairperson

Roger Merritt

Managing Director

+1-212-908-0636

or

Media Relations

Sandro Scenga, New York, +1-212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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