NEW YORK--()--Fitch Ratings has affirmed six classes of notes and revised Rating Outlooks on two classes of notes issued by NewStar Trust 2005-1 (NewStar 2005-1). A full list of rating actions follows at the end of this release.
The affirmation of the notes is due to the increased concentration risks of the portfolio, mitigated by the increased credit enhancement on the senior notes since the last review in September 2011. The credit enhancement has increased on the class A-1, class A-2 (collectively, the class A notes), the class B and the class C notes due to the principal payments of the class A notes. According to the trustee report dated July 25, 2012, the class A notes have received over $31.9 million since Fitch's last review through a combination of portfolio amortization and the diversion of excess spread to pay principal on the notes via the additional principal amount (APA). The performing portfolio, however, has become more concentrated due to charge-offs and portfolio amortization. The weighted average rating of the portfolio remains constant in the 'B-/CCC+' range. There continues to be significant exposure to low-rated assets, as Fitch considers approximately 44.3% of the total commitments of the performing portfolio in the 'CCC' category or below, compared to 48.7% in the last review.
The notes of NewStar 2005-1 benefit from the credit enhancement in the form of collateral coverage, note subordination, and the application of excess spread via the APA. For every dollar that is charged off of the performing portfolio, the APA feature directs the excess interest otherwise available to the certificate holders to pay down the senior-most notes in an amount equal to the charged-off amount. An additional $26.4 million of loans were charged off since the last review, while approximately $2.9 million of excess spread and recoveries from charged-off loans were used to pay the class A note principal balance. The cumulative APA currently stands at approximately $74.8 million after the July 2012 payment date, compared to the cumulative $17.9 million of APA redemptions made over the life of the transaction. This implies that an additional $56.9 million of excess spread and recoveries would have to be diverted to the senior notes in order to pay down the remaining APA balance, assuming that no additional charge-offs are made.
Fitch has revised the Outlooks on the class A and B notes to reflect its expectation that the performance of these notes will remain stable in the near term. The Rating Outlook on the class C notes remains Negative due to the growing amount of charge-off loans, resulting in higher concentration risks of the portfolio and its sensitivity to lower than expected recoveries. The portfolio consists of 30 unique obligors, with the top three obligors totaling approximately 23.8% of the performing portfolio. The underlying loan portfolio has significant exposure to commercial real estate loans at approximately 38% of the total committed amount of the portfolio. In addition, 13.4% of the portfolio is made up of long-dated collateralized loan obligations (CLOs), which may expose the transaction to market value risk when it reaches its maturity date in July 2018.
This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. These default and recovery levels were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. The default timing scenarios were also adjusted since the weighted average life of the portfolio was less than three years. As a result, Fitch assumed that a peak of 70% of defaults would occur in the first and second year of the front and back default timing scenarios, respectively, and defaults would be evenly distributed over two years in the middle default timing scenario. All classes of notes passed in all scenarios at rating levels in line with their current ratings. However, the class C, D, and E notes were sensitive to the future performance of an increasingly concentrated portfolio and lower than expected recoveries.
NewStar 2005-1 is a collateralized debt obligation (CDO) that closed on Aug. 10, 2005 and is managed by NewStar Financial, Inc. (NewStar). The transaction's reinvestment period ended in October 2008 and its legal final maturity date is in July 2018. NewStar 2005-1 is secured by a portfolio comprised of 48.6% corporate loans (primarily to middle-market issuers), 38% commercial real estate loans, and 13.4% of structured finance assets, based on the total performing commitment amount. The majority of these loans are not publicly rated. Instead, Fitch provided model-based credit opinions for 81.9% of the performing loans. Information for the model-based credit opinions was gathered from financial statements provided to Fitch by NewStar.
Fitch has affirmed the following ratings and revised Outlooks as indicated:
--$36,567,415 class A-1 notes at 'AAAsf'; Outlook revised to Stable from Negative;
--$18,666,968 class A-2 notes at 'AAAsf'; Outlook revised to Stable from Negative;
--$18,682,557 class B notes at 'AAsf'; Outlook revised to Stable from Negative;
--$39,233,370 class C notes at 'BBsf', Outlook Negative;
--$24,287,324 class D notes at 'CCCsf'; RE 80%;
--$24,287,324 class E notes at 'CCsf'; RE 0%.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The information used to assess these ratings was sourced from the asset manager, periodic servicer reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2012);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 6, 2011);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);
--'Structured Finance Recovery Estimates for Distressed Securities' (Nov. 16, 2011);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Global Rating Criteria for Corporate CDOs
Global Rating Criteria for Structured Finance CDOs
Global Criteria for Cash Flow Analysis in CDOs
Structured Finance Recovery Estimates for Distressed Securities
Criteria for Interest Rate Stresses in Structured Finance Transactions