Fitch Ratings has downgraded three and affirmed two classes of notes issued by Sankaty High Yield Partners III, L.P. (Sankaty III). A detailed list of rating actions follows at the end of this press release.
Sankaty III experienced an Event of Default (EOD) on Oct. 24, 2008. The trustee subsequently provided an Acceleration Notice, and Sankaty Advisors, LLC (the manager) has been winding down the portfolio with the consent of the controlling note class. The rating actions taken by Fitch reflect the EOD acceleration status of the transaction, market value subordination levels of the notes, the collateral remaining in the portfolio, and the length of the exposure period of the notes to the price movements of the collateral.
Sankaty III is structured as a market value collateralized debt obligation (CDO) which invested the proceeds of its note issuance in a diverse portfolio of bank loans, high yield securities, and mezzanine and special situation investments (including private equities and structured products). The portfolio currently consists of approximately 4% cash, 46% loans, and 50% category J assets (illiquid and private equity securities) with a market value of approximately $142.8 million as of Sept. 23, 2009.
Since Fitch's last review in February 2009, credit enhancement for the class A-2 and B notes has improved due to both the deleveraging of the transaction and the increase in prices of the underlying collateral. However, given that the deleveraging is driven by the EOD acceleration, the A-2 and B notes have been affirmed at their current ratings. Because of the improved credit enhancement, the notes have adequate protection against any future loan price movements and, as such, have been assigned a Stable Outlook.
Credit enhancement for the class C notes are dependent on liquidation proceeds from the category J assets which, as mentioned previously, typically consist of illiquid and private equity assets. The rating assigned by Fitch to this class of notes is based on the reliance on the recovery of the category J assets and the expected longer exposure period to price movements of the collateral relative to the senior notes.
As of Sept. 23, 2009, the class D notes had less than 1% of market value subordination giving full credit to the Category J assets. Thus, losses appears probable for the class D notes, though there is the potential for recovery if the liquidation of the collateral continues in an orderly fashion and price levels remain at current levels.
As of Sept. 23, 2009, the class E notes had no market value coverage. Thus, default appears inevitable for this class given the current price levels of loans.
Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are also available at 'www.fitchratings.com'.
The following rating actions are effective immediately:
--$24,478,245 class A-2 second senior secured notes are affirmed at 'BBB'; Outlook Stable;
--$40,500,000 class B third senior secured notes are affirmed at BB'; Outlook Stable;
--$50,500,000 class C senior subordinated notes downgraded to 'CC' from 'CCC';
--$21,000,000 class D subordinated secured notes downgraded to 'C' from 'CC';
--$12,500,000 class E junior subordinated secured notes are affirmed at'C'.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com'. The reports used in Fitch's analysis of Sankaty III were:
--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);
--'Rating Market Value Structures' (April 18, 2008);
--'Coercive Debt Exchange Criteria for Structured Finance' (June 3, 2009).
Additional information is available at www.fitchratings.com.
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Contacts:
Fitch Ratings, New York
Jenny Story, 212-908-0302
Taka
Ushiroda, CFA, 212-908-0881
or
Media Relations:
Sandro
Scenga, 212-908-0278
Email: sandro.scenga@fitchratings.com
