CHICAGO--(BUSINESS WIRE)--Fitch Ratings has taken the following rating actions on EIG's Global Project Fund II (GPFII):
--Class A-2-A floating-rate notes affirmed at 'BBBsf'; Outlook revised from Negative to Stable;
--Class A-2-B fixed-rate notes affirmed at 'BBBsf'; Outlook revised from Negative to Stable;
--Class B-1 floating-rate notes downgraded to 'CCCsf' from 'Bsf, Outlook Negative';
--Class B-2 fixed-rate notes downgraded to 'CCCsf' from 'Bsf', Outlook Negative;
--Class C floating-rate notes affirmed at 'CCsf;
--Class D floating-rate notes affirmed at 'Csf'.
Following the full principal repayment of the class A1 notes in July 2014, the class A2 notes became the senior most class in the capital structure and have since received approximately $67 million, or 96% of its previous outstanding balance. Subsequently, the credit enhancement level on the class A2 notes has increased and is sufficient to support the 'BBBsf' rating independently of the sale of the assets maturing after 2016.
Fitch's rating actions on the class B, and existing ratings on classes C and D reflect the following: (i) decrease in enhancement levels as a result of the sale/ prepayment of eight assets and the default of an additional asset; (ii) as the transaction is approaching its maturity date, these classes are exposed to a certain level of market risk as 71% of the performing assets must be sold prior to their maturity; and (iii) increasing obligor concentrations as the portfolio is now comprised by 3 performing and 2 defaulted assets.
GPF II is a securitization of project finance loans, mostly senior secured obligations from geographically diverse originators in the energy sector. The assets are mainly located in Mexico and the U.S. GPFII commenced operations on June 24, 2004 with a total capitalization of $700 million, consisting of $605 million of debt and $95 million of Preference Shares.
As of April 2015, the portfolio consisted of three performing and two defaulted assets with an outstanding pool balance of $121.76 million, and only $59 million performing. Approximately 71% of the outstanding balance related to performing loans matures after the maturity of the notes (June 2016).
KEY RATING DRIVERS
Higher Obligor Concentration: The underlying portfolio continues to have an increasing obligor concentration as a result of assets amortizing / defaulting and the notes approaching legal maturity. During the past 12 months, five assets were sold, three were prepaid or repaid and Cornhusker defaulted on its principal payment at maturity. The portfolio is comprised by only three performing and two defaulted assets. The exposure to a small number of assets carries the risk that portfolio performance may be adversely impacted by a few assets that may underperform expectations based on ratings and debt characteristics.
Increased Market Risk Exposure: As the transaction is approaching legal maturity the exposure to assets maturing after 2016 has increased. Approximately 71% of the performing loans, at par value, mature after June 2016. As a result, classes B, C and D are more dependent on the actual liquidation value and the ability of the portfolio manager to sell the long-dated assets prior to the maturity of the notes.
Distressed Class B, C and D Notes: Payment on class B, C and D notes is sensitive to recovery expectations and the execution price on the sale of the long-dated assets.
The ratings of the notes may be sensitive to the following: (i) decreases in credit enhancement; (ii) increases in asset defaults; (iii) portfolio migration, including assets being downgraded to 'CCC'; (iv) portions of the portfolio being placed on Rating Watch Negative; (v) performance test breaches and (vi) increased reliance on assets maturing after 2016. Fitch conducted rating sensitivity analysis on the structure and results are consistent with the rating actions.
This transaction was analyzed under the framework described in Fitch's 'Global Structured Finance Rating Criteria', 'Criteria for Rating Structured Finance Transactions in Emerging Markets' and 'Global Rating Criteria for Corporate CDOs'. However, given the high obligor concentration as the portfolio is comprised by only 3 performing assets, Portfolio Credit Model (PCM) was not used to project future default levels. Instead, a more deterministic approach was used to analyze potential cashflows that support the payment on the notes and sensitivities related to market risk and recovery expectations were incorporated in the analysis of this transaction.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (March 2015);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 2014);
--'Global Rating Criteria for Corporate CDOs' (July 2014);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (December 2014);
--'Criteria for Rating Structured Finance Transactions in Emerging Markets' (November 2014).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Counterparty Criteria for Structured Finance and Covered Bonds
Global Rating Criteria for Corporate CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Criteria for Rating Securitizations in Emerging Markets