NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on tranches from nine collateralized debt obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks:
--Affirmed 53 tranches;
--Upgraded three tranches;
--Revised various Rating Outlooks.
KEY RATING DRIVERS
Credit Quality of Collateral: For all the transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores and ratings has improved. Two transactions experienced new deferrals.
Collateral Redemptions: Seven CDOs received various levels of redemptions that paid down the senior-most notes and increased credit enhancement (CE) levels for rated liabilities. The magnitude of redemptions for each CDO is given in the rating action report. Potential upgrades were weighed against the risk of adverse selection in the remaining portfolios, especially those concentrated in fewer performing issuers and considered in the context of the likely time horizon for the notes paydown.
Excess Spread and CDO Structure: Excess spread continued to contribute to deleveraging of all CDOs due to the failing coverage tests. Fitch estimates the additional CE from excess spread as described in 'Surveillance Criteria for TruPS CDOs,' dated April 21, 2015. The uplift to the passing ratings from the excess spread ranged in magnitude from none to four notches across the CDOs included in this review. Given that the base line of excess spread receives a bigger haircut in higher rating stresses, notes rated at high investment-grade levels received less credit from projected future excess spread. Therefore, the impact is in general more significant for notes rated below investment grade.
Resolution and Recovery of Defaults and Deferrals: The number of cures continued to trend upward, as Fitch reports in its quarterly Fitch Bank TruPS CDO index. Fitch assesses the likelihood of a cure for a current deferral based on the score history of a deferring issuer since deferral, as described in its criteria. Deferring issuers defined as 'strong' are assigned a higher likelihood of curing than 'weak' deferrals. Fitch has observed one issuer in Tropic CDO III to re-defer, after it had previously paid its cumulative deferred interest. The re-deferral represents a total of 1.2% in the CDO's total portfolio balance. The deferral is considered weak in Fitch's analysis.
The key rating drivers highlighted above are incorporated in Fitch's TruPS model. The ratings on some notes passing at a high investment grade level were capped below their passing rating level, as indicated in the rating action report under 'Rating Rationale', due to portfolio concentration and expected long-term horizon for the notes' paydown that can result in rating volatility that Fitch views as inconsistent with the high investment-grade rating.
Due to ongoing litigation in regard to the correct interpretation of the payment provision of the indenture in Tropic CDO II, an amount equal to $9.3 million notional is held in escrow by the trustee pending the resolution of this matter by the court. Fitch did not give any credit to this amount in analysing the notes in Tropic CDo II.
RATING SENSITIVITIES
Changes in the rating drivers described above could lead to rating changes in the TruPS CDO notes. To address potential risks of adverse selection and increased portfolio concentration Fitch applied a sensitivity scenario, as described in the criteria.
To account for uncertainty around the pace of redemptions and cures and, consequently, magnitude of future excess spread, Fitch's rating analysis capped the levels of excess spread to the amounts projected only over the near term.
For non-deferrable notes, Fitch performs analysis of notes' interest sensitivity to additional defaults and deferrals, as described in the criteria. Ratings for non-deferrable notes are capped at the rating stress level corresponding to the magnitude of additional defaults and deferrals that could trigger a missed interest payment.
DUE DILIGENCE USAGE
No third party due diligence was reviewed in relation to this rating action.
Additional information is available at www.fitchratings.com.
Fitch Takes Various Actions on Ten Trust Preferred CDOs
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866900
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781
Global Rating Criteria for Corporate CDOs (pub. 25 Jul 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057
Global Structured Finance Rating Criteria (pub. 31 Mar 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864268
Surveillance Criteria for Trust Preferred CDOs (pub. 21 Apr 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864352
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985827
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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