NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded two and affirmed five classes and assigned Outlooks to two classes of notes issued by Palisades CDO, Ltd. (Palisades CDO), as follows:
--$85,637,475 class A-1A notes to 'Bsf' from 'CCCsf'; Outlook Stable;
--$1,403,893 class A-1B notes to 'Bsf' from 'CCCsf'; Outlook Stable;
--$88,500,000 class A-2 notes at 'Csf';
--$78,000,000 class B-1 notes at 'Csf';
--$6,000,000 class B-2 notes at 'Csf';
--$12,844,000 class C-1 notes at 'Csf';
--$13,266,501 class C-2 notes at 'Csf'.
This review was conducted under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Structured Finance Portfolio Credit Model (SF PCM) for projecting future default levels for the underlying portfolio. These default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. Fitch also considered additional qualitative factors in its analysis, as described below, to conclude the ratings for the notes.
KEY RATING DRIVERS
Since Fitch's last rating action in June 2012, the credit quality of the collateral has deteriorated with approximately 17.8% of the portfolio downgraded a weighted average of 3.0 notches and 2.6% upgraded a weighted average of 3.4 notches. Approximately 78.4% of the current portfolio has a Fitch derived rating below investment grade and 67.9% has a rating in the 'CCCsf' category or lower, compared to 76.9% and 68.2%, respectively, at last review.
The upgrade of the class A-1A and A-1B (collectively, the class A-1) notes is supported by the increase in the credit enhancement (CE) levels to these notes as a result of the continued deleveraging of the capital structure. Since the last review, the two pro-rata classes have collectively received approximately $45 million through principal repayments and excess spread redirected to cure the failure of the Class A/B Overcollateralization (OC) Test. This has more than offset the credit deterioration of the portfolio over the last year according to the improvements in the modeling results for the notes.
The class A-1 notes are assigned a Stable Outlook to reflect their cushion above the 'Bsf' rating level in the majority of modeling scenarios. This cushion is expected to protect the notes from potential deterioration of the underlying portfolio over the next one to two years.
The class A-2 have also benefited from the amortization of the capital structure as their credit enhancement has also increased. This class continues to receive timely interest payments, but given the priority of repayment and the amount of class A-1 notes still outstanding this class is not expected to receive any principal amortizations until the class A-1 notes are fully repaid.
While the class B-1 and B-2 (together, the class B) notes continue to receive their timely interest payments, these notes are undercollateralized compared to the remaining portfolio balance. As such, default continues to appear inevitable for the class B notes at or prior to maturity.
The class C-1 and C-2 (together, class C notes) are no longer receiving any interest payments and are not expected to do so in the future. Similar to the class B notes, the class C notes have experienced a decrease in their CE levels since last review, and remain significantly undercollateralized. As such, the notes are affirmed at their current ratings to reflect that default continues to appear inevitable for these notes at or prior to maturity.
RATING SENSITIVITIES
Future downgrades could result from a decrease in the underlying collateral's credit quality beyond what was projected by the SF PCM.
Palisades CDO is a structured finance collateralized debt obligation (SF CDO) that closed on July 15, 2004 and is managed by Western Asset Management Company. As of the April 2013 trustee report, the portfolio is comprised of residential mortgage backed securities (88.6%), consumer and commercial asset backed securities (9.4%), corporate CDOs (1.6%), commercial mortgage backed securities (0.3%), and SF CDOs (0.1%) primarily from 1997 through 2007 vintage transactions.
Additional information is available at 'www.fitchratings.com'.
The information used to assess these ratings was sourced from the issuer, periodic trustee reports, note valuation reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (May 24, 2013);
--'Global Rating Criteria for Structured Finance CDOs' (Oct. 3, 2012);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sep. 13, 2012);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Jan. 25, 2013).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708661
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=690203
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688518
Criteria for Interest Rate Stresses in Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695535
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793705
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