Fitch Rates Babson CLO Ltd. 2016-II/LLC

Fitch Ratings has assigned the following ratings and Rating Outlook to Babson CLO Ltd. 2016-II/LLC:

--$2,500,000 class X notes 'AAAsf', Outlook Stable;

--$252,000,000 class A notes 'AAAsf', Outlook Stable.

Fitch does not rate the class B, C, D, E and subordinated notes.

TRANSACTION SUMMARY

Babson CLO Ltd. 2016-II (the issuer) and Babson CLO 2016-II, LLC (the co-issuer) comprise an arbitrage cash flow collateralized loan obligation (CLO) that will be managed by Babson Capital Management LLC. Net proceeds from the issuance of the secured and subordinated notes will be used to purchase a portfolio of approximately $400 million of primarily senior secured leveraged loans. The CLO will have an approximately 4.2-year reinvestment period and a 2.2-year non-call period.

KEY RATING DRIVERS

Sufficient Credit Enhancement: Credit enhancement (CE) of 37.0% for class A notes, in addition to excess spread, is sufficient to protect against portfolio default and recovery rate projections in the 'AAAsf' stress scenario. The degree of CE available to the class A notes is in line with the average CE of recent CLO issuances, and cash flow modeling results indicate performance in line with other Fitch-rated 'AAAsf' CLO notes. Class X notes are expected to be paid in full from the application of interest proceeds in accordance with a payment schedule.

'B+/B' Asset Quality: The average credit quality of the indicative portfolio is 'B+/B', which is comparable to recent CLOs. Issuers rated in the 'B' rating category denote a highly speculative credit quality; however, in Fitch's opinion, class X and A notes are unlikely to be affected by the foreseeable level of defaults. Class X and A notes are robust against default rates of up to 100.0% and 63.9%, respectively.

Strong Recovery Expectations: The indicative portfolio consists of 98.4% first-lien senior secured loans. Approximately 94.4% of the indicative portfolio has either strong recovery prospects or a Fitch-assigned Recovery Rating of 'RR2' or higher, and the base case recovery assumption is 79.7%. In determining the class X and A note ratings, Fitch stressed the indicative portfolio by assuming a higher portfolio concentration of assets with lower recovery prospects and further reduced recovery assumptions for higher rating stresses, resulting in a 39.2% recovery rate assumption in Fitch's 'AAAsf' scenario.

RATING SENSITIVITIES

Fitch evaluated the structure's sensitivity to the potential variability of key model assumptions, including decreases in recovery rates and increases in default rates or correlation. Fitch expects the class A notes to remain investment grade even under the most extreme sensitivity scenarios, with results under these sensitivity scenarios ranging between 'A-sf' and 'AAAsf'. The class X notes are expected to remain 'AAAsf' under even the most extreme sensitivity scenarios.

Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report, which will be available to investors shortly on Fitch's website at www.fitchratings.com.

USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10

Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.

REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS

A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool was not prepared for this transaction. Offering documents for U.S. CLO transactions do not typically include RW&Es that are available to investors and that relate to the asset pool underlying the security. Therefore, Fitch credit reports for U.S. CLO transactions will not typically include descriptions of RW&Es. For further information, please see Fitch's Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated May 31, 2016.

Additional information is available at www.fitchratings.com.

Sources of Information:

Sources of information used to assess this rating were provided by the arranger (Morgan Stanley & Co. LLC.) and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 18 Jul 2016)

https://www.fitchratings.com/site/re/884963

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 17 May 2016)

https://www.fitchratings.com/site/re/879815

Global Rating Criteria for CLOs and Corporate CDOs (pub. 28 Jul 2016)

https://www.fitchratings.com/site/re/885653

Global Structured Finance Rating Criteria (pub. 27 Jun 2016)

https://www.fitchratings.com/site/re/883130

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010809

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010809

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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