NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded 13 tranches, affirmed 59 tranches of total 72 tranches from 10 Collateralized Debt Obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks and insurance companies:
The rating action report, titled 'Fitch Takes Various Rating Actions on 10 TruPS CDOs', dated July 31, 2014, details the individual rating actions and portfolio characteristics for each rated CDO. It can be found on Fitch's website at www.fitchratings.com' by performing a title search or by using the link below. For further information and transaction research, please refer to 'www.fitchratings.com'.
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 detailed in the rating action report.
Collateral Redemptions: Seven CDOs received some level of redemptions that paid down the most senior notes and increased credit enhancement (CE) levels for other rated notes. The magnitude of redemptions for each CDO is reported in the rating action report. Potential upgrades were weighed against the risk of adverse selection in the remaining portfolios and the likelihood of the remaining note balance to be outstanding for an extended period of time.
Excess Spread and CDO Structure: Excess spread continued to contribute to deleveraging of all CDOs. However the level of benefit for the most senior notes from excess spread varied across these transactions. In four transactions the excess spread is currently paying down the capitalized interest on mezzanine notes. In one transaction, I-Preferred Term Securities IV, all coverage tests are currently passing and excess spread is captured through the Turbo mechanism. Across the 10 deals, this credit enhancement provided an uplift of varying magnitude to the passing ratings, from none to a maximum of three notches. Given that the base line of excess spread received a bigger haircut in higher rating stresses, notes rated at high investment grade levels received less credit in Fitch analysis from projected future excess spread. Therefore, the impact was in general more significant for notes rated below investment grade. Fitch estimates future levels of excess spread as described in the criteria 'Surveillance Criteria for TruPS CDOs,' dated April 21, 2014.
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. All but two transactions experienced new cures since last rating review. 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 the criteria. Deferring issuers defined as 'strong' are assigned a higher likelihood of curing than 'weak' deferrals.
The key rating drivers highlighted above are incorporated in Fitch's TruPS model. Notes passing at a high investment grade level may have been capped below their passing rating if the notes are expected to remain outstanding for a sufficiently long time horizon and be exposed to a potential deterioration more severe than the one reflected in the sensitivity scenario. This could result in rating volatility that Fitch views as inconsistent with the high investment grade rating.
Fitch's rating action report details where a rating cap was applied.
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 future.
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 Research:
--'Surveillance Criteria for Trust Preferred CDOs' (April 21, 2014);
--'Global Rating Criteria for Corporate CDOs' (July 25, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014);
--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (May 28, 2014).
Applicable Criteria and Related Research: Fitch Takes Various Actions on 10 Trust Preferred CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754157
Surveillance Criteria for Trust Preferred CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=745339
Global Rating Criteria for Corporate CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843303
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