NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on all classes of notes from two European collateralized debt obligations (CDOs) as follows:
Taberna Europe CDO I P.L.C. (Taberna Europe I)
--EUR291,168,168 class A1 notes at 'Bsf'; Outlook remains Negative;
--EUR90,500,000 class A2 notes at 'CCsf';
--EUR50,019,040 class B notes at 'Csf';
--EUR31,422,782 class C notes at 'Csf';
--EUR34,129,327 class D notes at 'Csf';
--EUR24,305,165.95 class E notes at 'Csf'.
Taberna Europe CDO II P.L.C. (Taberna Europe II)
--EUR404,676,157 class A1 notes at 'CCCsf';
--EUR95,000,000 class A2 notes at 'CCsf'.
KEY RATING DRIVERS
The affirmations for the notes at their current ratings reflect no major changes in the portfolio since last review.
In both Taberna Europe I and Taberna Europe II, the credit quality of the collateral remained relatively stable since last review. In Taberna Europe I, 17% of the portfolio was upgraded versus 8.3% downgraded. However, the magnitude of upgrades was modest, in the same range as the downgrades and not exceeding a category on average. One previously deferring issuer that comprises 3.8% of the current portfolio notional has defaulted. In this portfolio, 48% of total notional value of EUR530 million as of the November 2013 trustee report, is publicly rated, with the remainder assigned credit opinions. At this review, 32.9% of the portfolio is rated or carries a credit opinion-equivalent of investment grade versus 33.4% at last review.
In Taberna Europe II, 14.6% of the portfolio was upgraded versus 12% downgraded, with the average magnitude of the downgrades slightly higher than that of the upgrades. In addition, there were two new defaults making up 7.7% of the current portfolio notional, including one previously deferring issuer. In this transaction, 56% of the current portfolio notional value of EUR676 million as of the November 2013 trustee report is publicly rated, with the remainder assigned credit opinions. At this review, 34.3% of the portfolio is rated or carries a credit opinion-equivalent of investment grade compared to 33.6% at last review.
The paydowns in both transactions were limited and mainly from the redemption of one asset in each portfolio. The class A-1 notes received 1.8% of the last review balance of $296 million in Taberna Europe I and 3.1% of the $417 million balance in Taberna Europe II. Therefore, the increase in the credit enhancement since last review was modest.
The percentages of distressed assets that are currently not paying interest are 19.8% and 18.6%, in Taberna Europe I and Taberna Europe II, respectively. The high percentage of non-performing assets combined with sizeable out-of-the money interest rate swaps, and a fixed schedule of substantial structuring and placement fees continue to contribute to the high risk of interest shortfall in both transactions. The structuring fee in the interest waterfall is paid senior to the interest due on the non-deferrable classes. The senior management fee was deferred and structuring fees waived in full or partially in both transactions on a number of payment dates in the past two years which allowed non-deferrable classes to receive timely interest. The decision to waive the structuring fee or defer the management fee is made separately for each payment period; therefore no certainty exists that this will continue in the future. The Negative Outlook for the A1 notes in Taberna Europe I reflect the risk of interest shortfall. Fitch does not assign Outlooks to notes rated below 'Bsf'; however, the current ratings on the non-deferrable classes in both transactions appropriately reflect the risk.
The portfolios in both transactions are comprised primarily of senior unsecured, subordinate debt, and Trust Preferred Securities (TruPS) issued by Real Estate Investment Trusts (REITs), and make up 81% of the portfolio in Taberna Europe I and 68% in Taberna Europe II. The remaining exposure consists of securities issued by financial companies, commercial mortgage backed securities, and commercial real estate debt.
This review was conducted under the analytical framework described in the reports 'Global Rating Criteria for Structured Finance CDOs', and 'Global Rating Criteria for Corporate CDOs'. The transactions were analyzed within the framework of Fitch Portfolio Credit Model (PCM), and for each transaction, the PCM rating loss rates for various rating stresses were compared to the notes' credit enhancement levels. The transactions were not analyzed within a cash flow model framework, as the impact of structural features and excess spread was determined to be minimal in the context of these CDO ratings. Fitch also considered additional qualitative factors in its analysis to conclude the rating actions for the rated notes.
The non-deferrable classes in each of these two transactions could experience interest shortfalls and be downgraded to 'Dsf' as described above.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2013);
--'Global Rating Criteria for Structured Finance CDOs' (Sept. 12, 2013);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 13, 2013).
Applicable Criteria and Related Research:
Counterparty Criteria for Structured Finance and Covered Bonds
Global Rating Criteria for Structured Finance CDOs
Global Rating Criteria for Corporate CDOs
Global Structured Finance Rating Criteria