NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings on 20 classes and upgraded three classes of notes from three Dekania European collateralized debt obligations (CDOs). A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrades to the senior notes in all three transactions were primarily due to deleveraging which in turn increased the notes' credit enhancement levels. In all three transactions, the principal proceeds used to pay down the notes were primarily from assets that redeemed at their first call date, including perpetual assets. Fitch expects the class A1 notes in Dekania Europe I to be paid in full by the next anticipated annual review of the transaction as there is sufficient performing collateral scheduled to mature by July 2017. In Dekania Europe II, the class A1 notes received approximately 52% of its previous review balance. The class A1 notes in Dekania Europe III paid down 13% since last review. Fitch expects further potential deleveraging in this transaction based on our discussions with the CDO manager, given that 71% of the performing portfolio has first call dates in 2017.
The high degree of concentration in all three transactions and significant exposure to the perpetual securities in Dekania Europe III contribute to the tail risk that may affect non-senior notes. There are 15 performing issuers in Dekania Europe I, 15 in Dekania Europe II and 18 in Dekania Europe III.
Perpetual securities comprise 2% of the performing portfolio in Dekania Europe I, 14% in Dekania Europe II, and 52% in Dekania Europe III. Perpetual securities were treated as long-dated assets as described in the "Global Rating Criteria for CLOs and Corporate CDOs" whereby they are assumed to default and receive the assumed recovery value at the maturity of the CDO notes, which would be zero in the case of perpetual securities.
Fitch also considered the trend of assets redeeming at their respective first call dates and ran an additional scenario in which investment-grade, publicly traded assets were assumed to redeem at their respective initial call dates.
Given the continuing deleveraging and overall stable credit quality of the collateral in these three transactions, Fitch does not expect deterioration of the ratings in the near future and thus maintains the Stable Outlook for classes rated 'Bsf' or higher.
One issuer re-deferred since last review, representing 7.1% and 6.9% of the total portfolio in Dekania Europe II and Dekania Europe III, respectively.
Fitch analyzed the transaction in accordance with the "Global Rating Criteria for CLOs and Corporate CDOs" using the Corporate Portfolio Credit Model (PCM) to project default hurdles, and cash flow modelling analysis was performed for the notes to measure the breakeven levels under the various default timing and interest-rate stress scenarios.
Significant paydowns combined with stable or improving credit migration can lead to limited upgrades for the senior notes. Conversely, significant collateral quality deterioration, new deferrals or defaults or maturity extension, especially in the absence of calls from perpetual issuers, could lead to a downgrade of the ratings for the notes.
VARIATIONS FROM CRITERIA
Perpetual securities were treated as long-dated assets in all three transactions whereby they were defaulted at the transaction legal maturity consistent with Fitch's treatment of long-dated assets under the relevant criteria. Fitch considered this a criteria variation given that perpetual securities are not explicitly mentioned in Fitch's treatment of long-dated assets. Fitch does not believe such variation has a measurable impact upon the ratings assigned.
The final rating of the A1 notes in Dekania Europe I, 'AAAsf', deviates from the model-implied rating of 'BBB+sf' by more than three notches. However, the lower passing ratings were indicated in just two frontloaded default scenarios that the committee agreed to be an unlikely outcome. After the upcoming payment period, the class A1 note balance is expected to be paid down to approximately EUR7 million, while an additional EUR13.8 million of underlying assets are scheduled to mature by July 2017.
DUE DILIGENCE USAGE
No third-party due diligence was reviewed in relation to this rating action.
Fitch has taken the following rating actions;
Dekania Europe CDO I P.L.C. (Dekania Europe I)
--EUR18,065,844 class A1 notes upgraded to 'AAAsf' from 'AAsf'; Outlook Stable;
--EUR11,500,000 class A2 notes affirmed at 'Asf'; Outlook Stable;
--EUR13,000,000 class A3 notes affirmed at 'Asf'; Outlook Stable;
--EUR35,000,000 class B1 notes affirmed at 'BBsf'; Outlook Stable;
--EUR15,000,000 class B2 notes affirmed at 'BBsf'; Outlook Stable;
--EUR29,500,000 class C notes affirmed at 'B-sf'; Outlook Stable;
--EUR15,461,821 class D notes affirmed at 'CCCsf'.
Dekania Europe CDO II P.L.C. (Dekania Europe II)
--EUR47,410,200 class A1 notes upgraded to 'AAsf' from 'Asf'; Outlook Stable;
--EUR25,000,000 class A2-A notes affirmed at 'BBBsf'; Outlook Stable;
--EUR5,000,000 class A2-B notes affirmed at 'BBBsf'; Outlook Stable;
--EUR26,515,950 class B notes affirmed at 'BBsf'; Outlook Stable;
--EUR29,496,733 class C notes affirmed at 'Bsf'; Outlook Stable;
--EUR14,508,139 class D1 notes affirmed at 'CCsf';
--EUR2,763,490 class D2 notes affirmed at 'CCsf';
--EUR17,468,682 class E notes affirmed at 'Csf'.
Dekania Europe CDO III P.L.C. (Dekania Europe III)
--EUR92,027,247 class A1 notes upgraded to 'BBBsf' from 'BBsf'; Outlook 'Stable';
--EUR16,000,000 class A-2A notes affirmed at 'Bsf'; Outlook 'Stable';
--EUR12,000,000 class A-2B notes affirmed at 'Bsf'; Outlook 'Stable';
--EUR25,681,233 class B notes affirmed at 'CCCsf';
--EUR20,822,890 class C notes affirmed at 'CCsf';
--EUR14,383,710 class D notes affirmed at 'Csf';
--EUR10,597,942 class E notes affirmed at 'Csf';
--EUR5,434,231 class F notes affirmed at 'Csf.
Fitch does not rate the subordinated notes for Dekania Europe I and II.
Additional information is available at www.fitchratings.com.
Sources of Information:
The information used to assess these ratings was sourced from trustee reports and the public domain.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
Counterparty Criteria for Structured Finance and Covered Bonds: Derivative Addendum (pub. 18 Jul 2016)
Criteria for Country Risk in Global Structured Finance and Covered Bonds (pub. 26 Sep 2016)
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 26 Oct 2016)
Global Rating Criteria for CLOs and Corporate CDOs (pub. 09 Sep 2016)
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
Dodd-Frank Rating Information Disclosure Form
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