Fitch Ratings affirms all four classes of notes issued by CoLTS 2005-2 Ltd./Corp. (CoLTS 2005-2) and assigns Rating Outlooks. The following rating actions are effective immediately:
--$270,000,000 class A notes affirmed at 'AAA'; Rating Outlook Stable;
--$16,000,000 class B notes affirmed at 'AA'; Rating Outlook Stable;
--$34,000,000 class C notes affirmed at 'A'; Rating Outlook Stable;
--$20,000,000 class D notes affirmed at 'BBB' and removed from Rating Watch Negative; Rating Outlook Negative.
CoLTS 2005-2 is a cash flow collateralized loan obligation (CLO) that closed Jan. 10, 2006 and is managed by Structured Asset Investors, LLC - Middle Market Capital. CoLTs 2005-2 is a revolving transaction comprised of 72% traditional middle market loans, 23.2% large middle market loans, and 4.7% broadly syndicated loans as of the trustee report dated Sept. 5, 2008. The reinvestment period will end in March 2009. In addition, the portfolio is composed of 97.4% first lien and 2.6% second lien loans. The three largest Fitch industry concentrations in CoLTS 2005-2 are computers and electronics (14.6%), healthcare (13.1%), and business services (11.6%). The five largest obligors represent approximately 13.9% of the total notional, and the single largest exposure is a defaulted obligor accounting for approximately 4.2% of the portfolio. Included in this review, Fitch discussed the current state of the portfolio with the asset manager and their portfolio management strategy going forward.
The affirmations are the result of the credit support still available to the rated notes through overcollateralization and excess spread, despite the credit deterioration in the portfolio. The current average credit quality of the performing portfolio is 'B/B-', which is in line with the expectations at close. While the average portfolio credit quality has remained relatively stable, the portfolio has experienced negative credit migration. Defaulted assets have increased to 6.3% of the portfolio from 0.0% at last review in April 2007. Likewise, assets considered 'CCC+' or lower account for 13.3% of the portfolio from 0.0% at the last review. That said, the overcollateralization (OC) test is still passing its trigger of 112.65%, despite a decrease to 115.89% from 116.26% at last review. Also, Fitch notes that during the revolving period, if the OC ratio falls below 115.15%, all excess interest proceeds that would otherwise be available to the preference shares are diverted to purchase additional collateral to build support for the rated notes. Such diversion of interest proceeds has occurred once, when the OC ratio fell to 113.7% on the March 20, 2008 payment date, and approximately $3 million in excess interest proceeds were diverted to purchase additional collateral.
The Rating Outlook Negative assigned to the class D notes reflects Fitch's view with respect to the pace at which negative credit migration has occurred within the portfolio. Compared to other Fitch-rated middle market CLOs, defaults have occurred relatively early in the transaction. This, combined with the level of assets rated 'CCC+' or below and increasing recessionary pressures, leaves the class D notes more vulnerable than the rest of the rated notes to further credit deterioration in the intermediate term.
The rating of the class A notes addresses the likelihood that investors will receive full and timely payments of interest, as per the transaction's governing documents, as well as the stated balance of principal by the legal final maturity date. The ratings of the class B, C, and D notes address the likelihood that investors will receive ultimate and compensating interest payments, as per the transaction's governing documents, as well as the stated balance of principal by the legal final maturity date.
Fitch reviewed this transaction in accordance with its updated criteria released on April 30, 2008 for corporate CDOs. At that time, Fitch noted it would be reviewing its ratings accordingly to establish consistency for existing and new transactions. As part of this review, Fitch makes standard adjustments for any names on Rating Watch Negative or with a Negative Outlook, reducing such ratings for default analysis purposes by two notches and one notch, respectively.
Fitch introduced Rating Outlooks for U.S. structured finance in September 2008 to provide investors with forward-looking analysis for a structured finance tranche's credit performance. Fitch's Rating Outlook indicates the likely direction of any rating change over a one- to two-year period and may be Positive, Negative, Stable or, occasionally, Evolving. More information is available in Fitch's Sept. 11, 2008 report 'Introducing Rating Outlooks for U.S. Structured Finance Bonds'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.