Fitch Takes Various Actions on 10 Trust Preferred CDOs

NEW YORK--()--Fitch Ratings has taken the following rating actions on tranches from 10 collateralized debt obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks and insurance companies:

--Affirmed 65 tranches;

--Upgraded seven tranches;

--Revised various Rating Outlooks.

KEY RATING DRIVERS

Credit Quality of Collateral: For all of the transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores and ratings, remained stable or improved. Five transactions experienced new deferrals or defaults.

Collateral Redemptions: Eight 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 reported in the accompanying 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. In four transactions the excess spread will be paying down the capitalized interest on mezzanine notes. In Preferred Term Securities XIX and XXVIII the excess spread from the failure of third priority overcollateralization (OC) test is currently used to pay down the class A, B and the class A, B and C notes on a pro rata basis respectively, that results in less benefit to the most senior notes.

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 three 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.

As a result of cures and transactions deleveraging, in three CDOs (Preferred Term Securities XX, XXV and XXVI), the mezzanine or senior coverage OC tests began to pass which led to the resumption of interest payments to mezzanine classes previously cut off from distributions.

Fitch has observed 10 issuers across six different transactions to re-defer, after they had previously paid their cumulative deferred interest. These redeferrals represent an average of 0.74% of portfolio notional across the six CDOs' portfolios. The re-deferring issuers are considered weak as defined in the 'Surveillance Criteria for TruPS CDOs'.

Ratings on some junior classes of notes were capped below the passing levels to reflect their low performing CE in comparison to the averages for the relevant rating levels.

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 10 Trust Preferred CDOs

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869005

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. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Surveillance Criteria for Trust Preferred CDOs (pub. 21 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864352

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988425

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988425

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Azadeh Sharif
Associate Director
+1-212-908-0874
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak
Senior Director
+1-312-368-3184
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Azadeh Sharif
Associate Director
+1-212-908-0874
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak
Senior Director
+1-312-368-3184
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com