Fitch Affirms All Classes of Three Insurance TruPS CDOs

NEW YORK--()--Fitch Ratings has affirmed the following ratings on all classes of notes from three collateralized debt obligations (CDOs) backed primarily by trust preferred (TruPS) securities and surplus notes issued by insurance companies:

Insurer Collateralized Obligation Notes, Ltd. (ICONS)

--$63,422,478 class A notes at 'BBBsf', Outlook Negative;

--$39,029,217 class B notes at 'BBsf', Outlook Negative;

--$6,679,638 class C-1 notes at 'Bsf', Outlook Stable;

--$16,699,094 class C-2 notes at 'Bsf', Outlook Stable;

--$5,009,728 class C-3 notes at 'Bsf', Outlook Stable;

--$16,699,094 class D notes at 'CCCf';

--$12,844,683 class II combination notes at 'CCCf'.

InCapS Funding I Ltd. (InCapS I)

--$31,980,634 class B-1 notes at 'Bsf'; Outlook Stable;

--$48,455,506 class B-2 notes at 'Bsf'; Outlook Stable;

--$15,000,000 class C notes at 'CCCsf'.

InCapS Funding II Ltd. (InCapS II)

--$47,827,907 class A-2 notes at 'Asf'; Outlook Stable;

--$47,500,000 class B-1 notes at 'CCCsf';

--$47,000,000 class B-2 notes at 'CCCsf';

--$13,327,546 class C notes at 'CCCsf'.

Fitch does not rate the Preference Shares in ICONS and Income Notes in InCapS I and II.

KEY RATING DRIVERS

Credit Quality of Collateral: The credit quality of these three collateral portfolios have been relatively stable with the average credit quality remaining at 'BB-/BB+' for this year's review. This is supported by relatively stable performance, with no new deferrals or defaults over a 12-month period ending August 2015. Further reflecting the relatively stable credit performance of the underlying portfolios, all coverage tests in the three CDOs continue to pass.

Collateral Redemptions: InCapS I and II received marginal levels of redemptions that paid down the senior-most notes and slightly increased credit enhancement (CE) levels for rated liabilities. The balance of the collateral notional in ICONS has not been changed since last review. These portfolios are concentrated with fewer than 20 performing issuers in each portfolio.

Excess Spread and CDO Structure: The forward turbo in ICONS and optimal principal distribution amount (OPDA) feature in InCaps I are directing a portion of interest proceeds to pay down the class A and B notes in ICONS and class B notes in InCaps I. The reverse turbo feature in InCapS II is only benefiting the class C notes. Across these deals, the additional CE from the excess spread analysis did not provide a meaningful uplift to the passing ratings given the haircuts applied to the baseline of excess spread levels for various rating stresses and the outsized interest rate swaps in these three CDOs.

The ratings on the non-deferrable classes of the notes in ICONS reflect the risk of interest shortfall caused by an outsized interest rate swap and volatility of interest collections resulting from 34% of the collateral notional paying on a semi-annual basis. Although the notes can withstand higher rating stresses than their current ratings with regards to principal coverage, their ratings are limited by their ability to pay timely interest.

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. The outcome of this analysis is considered in determining appropriate rating levels for non-deferrable notes.

DUE DILIGENCE USAGE

No third party due diligence was reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

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

Global Rating Criteria for CLOs and Corporate CDOs (pub. 30 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868908

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=989954

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989954

Endorsement Policy

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

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Contacts

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

Contacts

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