CHICAGO--()--Fitch Ratings has affirmed 128 tranches, upgraded 22 tranches, and downgraded three tranches from 22 Trust Preferred (TruPS) Collateralized Debt Obligations (CDOs) backed by bank, insurance and other collateral. In addition, Fitch has assigned various Rating Outlooks.
The rating action report, titled 'Fitch Takes Various Rating Actions on 22 TruPS CDOs', dated Aug. 31, 2012, details the individual rating actions and portfolio characteristics for each rated CDO. It can be found on Fitch's web site at 'www.fitchratings.com' by performing a title search or by using the link below. For further information and transaction research, please refer to 'www.fitchratings.com'.
The key rating factors for today's rating actions are highlighted below.
Credit Quality of Collateral: For the most transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores, insurance scores, credit opinions, and ratings, remained stable over the past year. The number of new deferrals and defaults has come down since the elevated levels of 2009 and 2010, as well as compared to the first half of 2011.
Collateral Redemptions: All of these transactions benefited from the paydowns to the most senior classes outstanding, due to TruPS redemptions, excess spread or a combination of the two. In many transactions, the underlying TruPS have reached the end of their non-call period, which Fitch believes contributed to some early redemptions. In addition, the phase-out of Tier I status for TruPS of banks with assets at or over $15 billion by 2016 will likely continue to contribute to the early redemptions by the impacted issuers in the next couple of years.
To account for a potential adverse selection and increased portfolio concentration after likely redemptions by the issuers with asset size exceeding $15 billion, Fitch applied a sensitivity scenario, in addition to the base case, as described in the criteria ' Global Surveillance Criteria for TruPS CDOs,' dated July 11, 2012. A higher weight was attributed to the outcome of the sensitivity scenario for some notes which are expected to remain outstanding for an extended period of time. These notes were passing at higher rating levels in the base case scenario but are exposed to a potential adverse selection and concentration in the longer term, as indicated by the results of the sensitivity scenarios. This risk could lead to a rating volatility which is inconsistent, in credit committee's view, with high investment grade rating levels.
The recently published 'Basel III' Notice of Proposed Rulemaking (NPR) proposed a gradual phase-out of the Tier I status for TruPS issued by banks and thrifts with assets at or over $500 million, with a complete phase-out by 2022. Given that this NPR is still subject to public comment, Fitch does not factor the impact of this proposed regulation in this rating action. Fitch will continue to monitor further development of the proposed rules and evaluate its implications on the assumptions regarding early redemptions.
Excess Spread and CDO Structure: In 20 of the transactions, interest proceeds continued to be redirected to pay down senior outstanding classes of notes. Due to deleveraging and cures, one transaction, whose senior coverage tests was failing at last review, is now passing. Additionally, one transaction has never experienced a senior coverage test failure. While curing of the senior coverage test is a reflection of the positive trends noted above, this is a negative factor for the senior classes going forward. Overall, the levels of excess spread used to deleverage the structure over the last several years, contributed meaningfully to the increased credit enhancement levels for the senior classes.
Resolution and Recovery of Defaults and Deferrals: The number of cures has been trending upwards, with 71 previously deferring banks current on their interest as of July 2012 as compared to 31 during the same period last year. A cumulative total of 85 banks cured their interest obligations since third-quarter 2007. Of the 85 banks, eight are currently deferring on their interest obligation again, and six have redeemed their outstanding TruPS. As described in the 'Global Surveillance Criteria for Trust Preferred CDOs', Fitch assesses the likelihood of a cure for a current deferral based on the score history of a deferring issuer since deferral. Current 'strong' deferrals are assigned a higher likelihood of cure than 'weak' deferrals. For this review, the majority of current deferrals were considered to be 'weak', based on their recent score history.
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 trustee reports, collateral manager reporting Web sites and the public domain.
Applicable Criteria and Related Criteria:
-- 'Global Surveillance Criteria for Trust Preferred CDOs' (July 11, 2012);
-- 'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2012);
-- 'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
-- 'Criteria for Rating Caps in Global Structured Finance Transactions'(Aug. 2, 2012);
-- 'Bank TruPS CDO Default and Deferral Index as Of June 2012' (July 25, 2012).
Applicable Criteria and Related Research: Fitch Takes Various Rating
Actions on 22 TruPS CDOs
Global Surveillance Criteria for Trust Preferred CDOs
Global Rating Criteria for Corporate CDOs
Counterparty Criteria for Structured Finance Transactions
Criteria for Rating Caps in Global Structured Finance Transactions
Fitch Bank TruPS CDO Default and Deferral Index (As of June 2012)