Fitch Ratings downgrades six classes of notes issued by Coronado CDO, Ltd./Inc. (Coronado) as follows:
--$242,473,673 class A-1 notes to 'BB' from 'AA'; Outlook Negative;
--$3,215,831 class A-2 notes to 'BB' from 'AA'; Outlook Negative;
--$62,000,000 class B-1 notes to 'CC' from 'BB';
--$15,000,000 class B-2 notes to 'CC' from 'BB';
--$6,750,000 class C-1 notes to 'C' from 'B';
--$13,500,000 class C-2 notes to 'C' from 'B'.
Fitch has also removed the class B-1, B-2 (together, class B), C-1 and C-2 (together, class C) notes from Rating Watch Negative.
The class A-1 and A-2 (together, class A) notes were assigned a Negative Outlook due to the high concentration of residential mortgage-backed securities (RMBS) in the portfolio that are expected to continue to face negative pressure until the housing market stabilizes. Fitch does not assign Rating Outlooks to classes rated 'CCC' or below.
The downgrades to the notes are the result of credit deterioration experienced since Fitch's review in May 2008, and reflect Fitch's view on the credit risk of the rated notes following the release of its new rating criteria for structured finance collateralized debt obligations (SF CDOs). Fitch now considers 38.7% of the portfolio to be rated below investment grade with 21.5% of the portfolio considered rated 'CCC+' or lower. Approximately 19% of the portfolio is now considered defaulted per the transaction's governing documents.
MBIA Inc. (MBIA) insures the class A notes via an unconditional, irrevocable financial guarantee. However, because Fitch no longer rates MBIA, the current rating of the class A notes is based solely on the credit quality of the portfolio and on structural features of the transaction. Interest proceeds have been diverted to redeem class A principal after paying class B accrued interest on the previous two distribution dates due to the failure of the class B overcollateralization (OC) test. The class B OC ratio was 89.3% versus its trigger of 104.9% as of the March 31, 2009 trustee report. The class A OC test began to fail as of the March 31, 2009 trustee report with a ratio of 117.3% versus a 118.9% threshold. Class B will continue to receive interest even if the class A OC test continues to fail on the June 2009 payment date as class B accrued interest is paid prior the class A OC test.
The class B notes will continue to receive timely accrued interest distributions due to its position in the priority of payments. However, based on the performance expectations of the 'CCC+' or lower rated portion of the portfolio, they are not expected to receive any significant principal distributions. The class C-1 and C-2 notes are not expected to receive any interest or principal distributions going forward due to the failure of the class B OC test, which is unlikely to be cured.
Coronado is a SF CDO that closed on Sept. 4, 2003 and is managed by Western Asset Management Company. Coronado exited its reinvestment period in March 2007. The portfolio is comprised primarily of RMBS (63.9%), asset-backed securities (17.1%), commercial mortgage-backed securities (15%) and corporate CDOs (3.6%).
These rating actions resolve the 'Under Analysis' status issued on Oct. 14, 2008 following Fitch's announcement of its proposed criteria revision for analyzing SF CDOs. The revised criteria report, 'Global Rating Criteria for Structured Finance CDOs', was published in its final form on Dec. 16, 2008 along with an updated version of the Fitch Portfolio Credit Model (PCM) that includes additional functionality for analyzing SF CDOs. As part of this review, Fitch made standard adjustments for any names on Rating Watch Negative or with a Negative Outlook, downgrading such ratings for default analysis purposes by three and one notches, respectively.
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