Fitch Ratings has downgraded two and affirmed three classes of notes issued by South Coast Funding II, Ltd. (South Coast II), as follows:
--$230,763,020 class A-1 notes downgraded to 'CCC' from 'B';
--$40,050,000 class A-2 notes downgraded to 'CC' from 'CCC';
--$42,500,000 class A-3 notes affirmed at 'CC';
--$35,678,331 class B notes affirmed at 'C';
--$24,500,000 Preference Shares affirmed at 'C'.
In addition, Fitch has removed the class A-1 notes from Rating Watch Negative.
Fitch has taken these rating actions primarily due to negative credit migration in the portfolio attributed to the weak performance of the U.S. subprime residential mortgage-backed securities (RMBS) assets. The rating actions also incorporate Fitch's recently adjusted default and recovery rate assumptions for analyzing structured finance (SF) collateralized debt obligations (CDOs). Since the last review in May 2008, the portfolio has experienced negative credit migration within the portfolio, with 63. 7% of the portfolio downgraded a weighted average of 5.22 notches.
Approximately 77% of the portfolio is now rated below investment grade, as compared to the last review when non-investment grade assets comprised 61.2% of the portfolio. Assets rated 'CCC' or lower increased to 56.5% from 42.9% during the May 2008 review.
The extensive collateral deterioration within the portfolio, attributed to the weak performance of the subprime RMBS bonds and SF CDOs, led to an event of default (EOD). South Coast II declared an EOD on Feb. 10, 2009, following a drop of the class A overcollateralization (OC) ratio to below 100%. As of the time of this review, holders of majority of the senior notes have not elected to accelerate or terminate the transaction.
The continued deterioration of the portfolio, due to defaulted and distressed assets, has caused each of OC and interest coverage (IC) ratios to decline further below their trigger levels. As per the April 2009 Trustee report, the class A OC test level has dropped to 62.9% versus a trigger of 105.5%, while the class A IC test level has dropped to 69.3% versus the requirement of 112%. Similarly, the class B OC test level has declined to 56.5% and the class B IC test to 5.8%, failing their respective triggers of 102% and 107%. As a result of the coverage test failures, interest proceeds otherwise available to pay subordinated notes are being used to pay down the senior notes sequentially, until all of the OC and IC tests are cured.
As of the latest distribution date in April 2009, each of the class A-1, A-2 and A-3 notes continue to receive their interest payments. However, should the senior noteholders elect to accelerate the transaction, the class A-2 and A-3 noteholders would stop receiving their timely interest payments until the principal of the class A-1 notes is paid in full. Since closing, only 2% of the class A-1 notes have delevered. The class A-1 notes are expected to continue amortizing down; however, Fitch projects that only a portion, and not all, of the notes' original principal will be repaid to the holders by the maturity date. All other classes of notes are not expected to receive any principal payments in the future.
South Coast II is CDO that closed on June 6, 2002 and is managed by TCW Investment Management Company. The reinvestment period ended in June 2006. South Coast II has a portfolio comprised primarily of subprime RMBS bonds (57.6%), Alternative-A (Alt-A) RMBS (13.6%), prime RMBS (12.1%), and other structured finance assets. Subprime RMBS bonds of the 2004, 2005 and 2006 vintages account for approximately 6.9%, 25.1% and 6.0% of the portfolio, respectively. Subprime RMBS bonds of the 2003 and prior vintages account for approximately 19.5% of the portfolio. Alt-A RMBS of the 2004 and 2005 vintages represent approximately 12.1% of the current portfolio while 2003 and prior vintages represent 1.5%. The remaining 13.8% of the portfolio is composed of various commercial asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), and a small percentage REIT senior unsecured debt and of corporate and SF CDOs.
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 that includes additional functionality for analyzing SF CDOs. As part of this review, Fitch makes 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.
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.
Contacts:
Fitch Ratings, New York
Brian Vorderbrueggen, 212-908-9102
Kevin
Kendra, 212-908-0760
Media Relations:
Sandro Scenga,
212-908-0278
sandro.scenga@fitchratings.com