Fitch Ratings has upgraded one class of notes and affirmed four classes of notes issued by Rosemont CLO, Ltd./Corp. (Rosemont CLO). Rating Outlooks, Loss Severity (LS) Ratings, and Recovery Ratings have also been revised or assigned as follows:
--$21,011,960 class A notes affirmed at 'AAAsf/LS3'; Outlook Stable;
--$18,000,000 class B-1 notes affirmed at 'Asf/LS3'; Outlook to Stable from Negative;
--$7,000,000 class B-2 notes affirmed at 'Asf/LS3'; Outlook to Stable from Negative;
--$13,200,000 class C notes upgraded to 'BB/LS3' from 'B/LS4'; Outlook to Stable from Negative;
--$12,000,000 class D notes affirmed at 'CCsf', assigned 'RR2'.
The affirmations for class the A and class B-1 and B-2 notes (collectively, class B), in addition to the upgrade to the class C notes, reflect the relatively strong performance of the underlying loan portfolio, while accounting for the increased concentration risk in the portfolio and the generally uncertain U.S. economic recovery.
Since Fitch's last review in November 2009, the class A notes have received approximately $48 million of principal payments, representing 19% of their initial balance. This amortization has led to increasing credit enhancement levels across the capital structure. Additionally, Fitch recognizes the improving collateral quality of the underlying loan portfolio. The amount of performing assets Fitch considers rated 'CCC+' or below has decreased to 16.8% from 27.1% over this same time period, while the latest trustee report dated Oct. 29, 2010 indicates that defaulted assets now represent 10.3% of the entire portfolio, compared to 13.5% at the last review.
While the amortization has benefited all notes, increasing obligor concentration has become a factor as the top obligor now accounts for 6.8% of the portfolio, and the top five obligors account for 23.6% of the total portfolio.
The class A notes have been affirmed, as they should continue to perform in line with their current ratings. The class B notes have benefited from the amortization of the class A notes and will be next-in-line to receive principal payments. Fitch has affirmed the class B notes to reflect their high credit quality and has revised their Outlook to Stable.
The performance of the underlying loan portfolio since Fitch's last review has led to improved credit quality for the class C notes. At the time of Fitch's last review, the U.S. economy was in the midst of a severe economic downturn, experiencing near-record highs in corporate default rates and record lows in recovery rates. Rosemont CLO's underlying portfolio has since reflected the improved U.S. corporate performance, and Fitch believes the credit quality of the class C notes has likewise improved. Fitch recognizes that the class C notes remain exposed to potential concentration risk and a generally uncertain economic recovery, and has thus maintained a speculative rating for the notes, while the Outlook has been revised to Stable.
The class D notes maintain only minimal overcollateralization, and are highly vulnerable to the potential default of any of the underlying obligors. An ultimate principal impairment to these notes remains a possibility. Fitch has affirmed the notes and assigned a Recovery Rating based on the total discounted future cash flows projected to be available to these bonds in a base-case default scenario. These discounted cash flows of approximately $9.5 million yielded an ultimate recovery projection in a range between 71% and 90%, which is representative of an 'RR2' on Fitch's Recovery Rating scale. Recovery Ratings are designed to provide a forward-looking estimate of recoveries on currently distressed or defaulted structured finance securities rated 'CCC' or below. For further detail on Recovery Ratings, please see Fitch's report 'Criteria for Structured Finance Recovery Ratings'.
Each class of notes has been assigned a Loss Severity (LS) rating. The LS ratings indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the base-case loss expectation for the collateral, as explained in Fitch's 'Criteria for Structured Finance Loss Severity Ratings'. The LS rating should always be considered in conjunction with the notes' long-term credit rating.
Rosemont CLO is a collateralized debt obligation (CDO) that closed on Jan. 8, 2002 and is managed by Deerfield Capital Management LLC (Deerfield). The transaction's reinvestment period ended in January 2007. The portfolio is comprised of approximately 97.6% senior secured loans and 2.4% second lien loans.
The majority of the underlying loans are publicly rated. Fitch used model-based shadow ratings in its default probability analysis of the CDO portfolio for approximately 14.5% of the portfolio where a public rating was unavailable. Information for the model-based shadow ratings was gathered from financial statements provided to Fitch by Deerfield.
Additional information is available at 'www.fitchratings.com'.
The information used to assess these ratings was sourced from the asset manager, periodic servicer reports, note valuation reports, and the public domain.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 16, 2010);
--'Global Rating Criteria for Corporate CDOs' (July 5, 2010);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 17, 2010);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (Feb. 17, 2010);
--'Criteria for Structured Finance Recovery Ratings' (Aug. 17, 2009);
--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009).
Applicable Criteria and Related Research:
Criteria for Structured Finance Loss Severity Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=426038
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547326
Global Rating Criteria for Corporate CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=537494
Global Criteria for Cash Flow Analysis in CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557485
Criteria for Interest Rate Stresses in Structured Finance Transactions (Global SF)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=500306
Criteria for Structured Finance Recovery Ratings
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462434
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