Fitch Affirms Madison Arbor Senior Notes at 'AAA'

Fitch Ratings has affirmed the 'AAA' long-term rating assigned to series A senior notes maturing Dec. 17, 2018, issued by Madison Arbor Limited (Madison Arbor). 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). Madison Arbor is amending the margin terms of one loan participation, which will not have an impact on the rating of the senior notes.

KEY RATING DRIVERS

--High credit quality of underlying loans supported by margin policies including margin haircuts, minimum diversification standards, and asset eligibility criteria.

--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, which BNPP has a perfected security interest in and can liquidate over a short period of time (assumed seven to nine business days maximum) in event of CEF default.

--Structural protections in the form of overcollateralization (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 are held by BNPP.

--Capabilities of BNPP and its affiliates as originator of the underlying loans to effectively manage margin policies and perform duties as secured lender.

--Fitch's Country Ceiling for Ireland is 'AAA'.

CRITERIA VARIATION ANALYISIS

Fitch's analysis of Madison Arbor included a variation from Fitch's criteria 'Rating Closed-End Funds and Market Value Structures'. While Fitch's criteria are based on a market value exposure period of 45 business days, Fitch based its analysis on Madison Arbor's structurally shorter exposure period for common equity securities of 7-9 business days. To complete this analysis, Fitch reviewed the historical worst loss performance of common equity securities, as described in Appendix 5 of the criteria, over the shorter exposure period. This assessment results in a low level of assumed losses, which the Agency considers consistent with an 'AAA' rating. The model Fitch used to analyse Madison Arbor's structure was customized to reflect the shorter exposure period.

STRUCTURE

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.

AGENTS

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+').

PERFORMANCE ANALYTICS

Fitch monitors 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 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.

RATING SENSITIVITIES

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 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 downgraded 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'.

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:

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

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744175

Exposure Draft: Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=878412

Rating Closed-End Funds and Market Value Structures (pub. 11 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881003

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005280

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005280

Endorsement Policy

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

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