NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed 75, upgraded eight, and revised Rating Outlooks on four tranches from 12 collateralized debt obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks and insurance companies.
KEY RATING DRIVERS
Credit Quality of Collateral: In 10 transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores and ratings, remained stable or improved. Two transactions reported new deferrals or defaults since last review.
Collateral Redemptions: Five 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.
Resolution and Recovery of Defaults and Deferrals: The number of cures continued to outpace deferrals and defaults, as Fitch reports in its monthly Fitch Bank TruPS CDO Default and Deferral Index report. Fitch assesses the likelihood of a cure for a current deferral based on the score history of a deferring issuer since deferral.
Fitch assumes that 15% of recent cures, defined as curing within the last year, re-defer and are considered weak deferrals to account for observed re-deferrals by some issuers. The percentage of cures since last review for each CDO is reported in the accompanying rating action report.
CDO Structure: Excess spread continued to contribute to deleveraging of nine CDOs due to failing coverage tests. In the remaining three CDOs, excess spread will be paying down capitalized interest on mezzanine notes. The uplift from the excess spread ranged from none to five notches. For non-deferrable notes, Fitch performs analysis of the notes' interest sensitivity to additional defaults and deferrals. 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.
Performing CE Cap: The ratings on 29 classes of notes across all 12 transactions have been capped at their current rating level due to the application of performing CE cap as described in Surveillance Criteria for Trust Preferred CDOs.
Changes in the rating drivers 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.
DUE DILIGENCE USAGE
No third party due diligence was reviewed in relation to this rating action.
Additional information is available at www.fitchratings.com.
Sources of Information:
The information used to assess these ratings was sourced from trustee reports, collateral manager reporting web sites and the public domain.
Fitch Takes Various Actions on 12 Trust Preferred CDOs
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 12 Nov 2015)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
Surveillance Criteria for Trust Preferred CDOs (pub. 05 Apr 2016)
Dodd-Frank Rating Information Disclosure Form