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 37 tranches;
--Upgraded seven tranches;
--Revised various Rating Outlooks.
The key rating factors for today's rating actions are highlighted below.
KEY RATING DRIVERS:
Credit Quality of Collateral: For most 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. As reported in the rating action report, average credit quality has improved since last review in eight CDOs. Two transactions experienced new deferrals and/or defaults, with the new default deferring at last review.
Collateral Redemptions: All 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 six CDOs due to the failing coverage tests. In two transactions, Regional Diversified Funding 2004-1 and Trapeza CDO I, the excess spread is currently paying down the capitalized interest on more junior notes and is not expected to benefit the most senior notes in the next couple of years. 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 two 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 two issuers in Soloso CDO 2005-1to re-defer, after they had previously paid their cumulative deferred interest. These re-deferrals represent a total of 1.3% in the CDO's total portfolio balance. These deferrals are considered weak in Fitch 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.
Additionally, in one transaction, Soloso CDO 2005-1, the ratings on class A-1L notes were affirmed at 'Dsf' due to an outsized swap payment and possibility of interest shortfall on these classes. Fitch expects that this risk will be significantly reduced after the swap expires after the July 2015 payment date and will reevaluate the notes shortly after.
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.
Additional information is available at 'www.fitchratings.com'.
The information used to assess these ratings was sourced from trustee reports, collateral manager reporting Web sites and the public domain.
Applicable Criteria and Related Criteria:
-- Global Structured Finance Rating Criteria (March 31, 2015)
--'Surveillance Criteria for Trust Preferred CDOs' (April 21, 2015);
--'Global Rating Criteria for Corporate CDOs' (July 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);
--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (May 2014).
Applicable Criteria and Related Research: Fitch Takes Various Actions on Nine Trust Preferred CDOs
Surveillance Criteria for Trust Preferred CDOs
Global Structured Finance Rating Criteria
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions
Counterparty Criteria for Structured Finance and Covered Bonds
Global Rating Criteria for Corporate CDOs