NEW YORK--()--Fitch Ratings has affirmed the ratings on five classes and revised the Outlook on one class of notes issued by Pacific Bay CDO Ltd./Inc. (Pacific Bay) as follows:
-- $24,598,410 class A-1 notes at 'AAsf'; Outlook to Stable from
-- $64,000,000 class A-2 notes at 'Dsf';
-- $36,000,000 class B notes at 'Dsf';
-- $7,691,215 class C notes at 'Csf';
-- $17,000,000 preference shares at 'Csf'.
This review was conducted under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Structured Finance Portfolio Credit Model (SF PCM) for projecting future default levels for the underlying portfolio. These default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. Fitch also considered additional qualitative factors into its analysis, as described below, to conclude the rating affirmations for the rated notes.
Since the last rating action in January 2012, the credit quality of the collateral has deteriorated with approximately 39.8% downgraded a weighted average of 3.5 notches and 4.5% upgraded a weighted average of 1.0 notch. Approximately 72.5% of the portfolio has a Fitch derived rating below investment grade and 57.4% has a rating in the 'CCC' rating category or lower, compared to 71.1% and 46.8%, respectively, at last review.
This deterioration has been effectively offset by the continued deleveraging of the transaction. The class A-1 notes have received approximately $16.7 million, or 40.5% of its previous balance, in paydowns since the last review and are currently the only class receiving interest and principal payments due to an acceleration of the transaction. This has increased the class A-1 notes' credit enhancement, resulting in an affirmation of its rating. Fitch has revised the Outlook to Stable to reflect the available cushion in the cash flow modeling results to protect the notes against further potential deterioration in the credit quality of the underlying portfolio.
The class A-2 and B notes continue to miss their timely interest payments as a result of the acceleration. These non-deferrable classes are considered to be defaulted on the payment of interest and have been affirmed at 'Dsf'. Fitch expects the class A-2 notes to recover at least a portion, if not all, of the $2.9 million in defaulted interest by the stated maturity of the transaction.
The class C notes and the preference shares are no longer receiving interest distributions and are not expected to receive any proceeds going forward. Fitch believes that default is inevitable for these classes at or prior to maturity due to the concentration of distressed collateral. Therefore, these classes have been affirmed at 'Csf'.
Pacific Bay is a cash flow structured finance collateralized debt obligation that closed on Nov. 4, 2003. The portfolio is monitored by Pacific Investment Management Company LLC. (PIMCO) and is composed of 79.3% residential mortgage-backed securities, 12% corporate bonds, 6% asset-backed securities, and 2.7% commercial mortgage-backed securities, primarily from 1999 through 2005 vintage transactions.
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 issuer, periodic trustee reports, note valuation reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (June 6, 2012);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 3, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012).
Applicable Criteria and Related Research:
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Global Structured Finance Rating Criteria
Global Rating Criteria for Structured Finance CDOs