The Bank of New York Mellon, as the trustee (BoNY, or the Trustee), and Cohen & Company Financial Management LLC, as the Collateral Manager (Cohen, or the Manager), recently notified Fitch Ratings of their proposal to adopt a Policy and a Supplemental Indenture (the Amendments) related to asset exchanges in Alesco Preferred Funding I, II, III and IV (the collateralized debt obligations [CDOs]). The notice, dated Sept. 25, gives all relevant parties 15 business days to notify BoNY and Cohen if they feel the Amendments have a materially adverse affect. The notice further states that failure to notify the Trustee within the 15-day window then allows the Trustee to determine if any party is materially adversely affected. The 15-day period ends Monday, Oct. 19; however, the notice also states the proposed Amendments may become effective without all or a part of either document becoming effective. Contact information for BoNY and Cohen are listed at the end of this release.
Fitch encourages issuers and arrangers to disclose publicly, as early as possible, any proposed changes and amendments to transaction structures and documents to all interested parties. This will enable investors to conduct their own analysis in a timely fashion. Fitch is aware of at least one noteholder from each transaction that has strenuously objected to the proposed Amendments. Their objection letter to the Trustee and Manager contends that exchanges that have already occurred, and future exchanges contemplated by the Amendment are a violation of the management agreement and could lead to Cohen''s removal as Manager. Fitch is also aware that the hedge counterparty for Alesco Preferred Funding I and III has notified the Trustee in writing that they will be materially and adversely affected by the adoption of the Amendments.
Fitch is not a party to the transaction and therefore does not provide consent or approval, as that remains the sole preserve of the transaction parties. Fitch expects to be notified by the trustee when or if the proposed Amendments are executed either in part or in their entirety.
Exchanges governed by the proposed Policy would need to meet eligibility criteria that in Cohen''s judgment, improve the aggregate credit quality of the portfolio. Each replacement obligation from these exchanges would also be required to meet minimum credit quality characteristics. Overcollateralization (OC) tests would be prohibited from increasing or decreasing more than 2% over an Annual Period, as a result of exchanges under the proposed Policy. These exchanges would not be subject to substitution requirements, such as a minimum purchase price, or other restrictions that would otherwise prevent certain collateral to be included in the portfolio. The proposed Policy also states that exchanges involving securities issued by the same issuer are not governed by the proposal. These exchanges may or may not improve the credit quality of the portfolio and are not subject to limitations on changes to OC test levels.
The proposed Supplemental Indenture, would allow the CDO (or the Trustee on behalf of the CDOs) to make any change related to an exchange of an underlying security, so long as the Manager believes that investors will not be adversely affected. Fitch has observed in other trust preferred securities (TruPS) CDOs that debt exchanges may hide portfolio credit deterioration by increasing OC levels, thereby allowing failing performance tests to pass. This may result in changes to interest payment priorities and potentially prompt rating changes. Please see the press release, ''Fitch Places 28 Tranches in 8 REIT TruPS CDOs on Rating Watch Negative'' dated Sept. 16, 2009 and a forthcoming Special Report, ''Debt Exchanges in REIT TruPS CDOs'' on Fitch-observed debt exchanges in REIT TruPS CDO transactions to be published on or about Oct. 15, 2009.
Fitch maintains it ratings on the CDO based on the performance of the underlying portfolio and Fitch''s expectation for cash flows to the CDO notes. Since Fitch''s last rating review, some institutions that issued TruPS in these CDOs have optionally called their notes and new assets were added to the CDO portfolios. These transactions were classified as exchanges by the Manager and permitted by the Trustee under the existing indenture. In Fitch''s analysis of these CDOs it assumed that principal prepayments are used to redeem senior CDO notes in part or in whole. The proposed Amendments, in and of themselves, would not adversely impact Fitch''s ratings of the note liabilities of each CDO; however, any changes to the portfolio will be factored into Fitch''s future analysis of these CDOs.
The proposed amendment to the Indenture would also revise the definition of ''Rating Condition'', to require the issuer to provide written notice to Fitch 10 days prior to any proposed amendment or action taken on the notes, in place of a written response by Fitch.
Due to the nature of the proposed Amendment approval process, Fitch is providing contact information for both the Manager and Trustee. The affected CDOs and relevant BoNY contacts include:
--Alesco Preferred Funding I, Ltd. contact: Chuck Logan, +1-412-234-8334, firstname.lastname@example.org
--Alesco Preferred Funding II, Ltd. contact: Tara Moore, +1-412-234-0520, email@example.com
--Alesco Preferred Funding III, Ltd. contact: Nilesh Patel, +1-412-234-8362, firstname.lastname@example.org
--Alesco Preferred Funding IV, Ltd. contact: Farrukh Qureshi, +1-412-234-2472, email@example.com
Cohen contact: Sam Hillier, +1-215-701-9624, firstname.lastname@example.org
Additional information is available at ''www.fitchratings.com''.
Johann Juan, 312-368-3339 (Chicago)
Derek Miller, 312-368-2076 (Chicago)
Kevin Kendra, 212-908-0670 (New York)
Sandro Scenga, 212-908-0278 (New York)