Fitch Ratings has affirmed six classes of notes from Structured Enhanced Return Vehicle Trust, series 2006-1 (SERVES 2006-1), along with the corresponding Rating Outlooks as outlined below:
--$157,500,000 class A-1 revolving notes at 'Bsf'; Outlook Stable;
--$312,500,000 class A-2 notes at 'Bsf'; Outlook Stable;
--$29,167,000 class B notes at 'CCsf';
--$50,000,000 class C notes at 'Csf';
--$2,080,000 class D-1 notes at 'Csf';
--$2,087,000 class D-2 notes at 'Csf'.
The rating actions reflect Fitch's analysis of both the market value (MV) and the credit risk of the portfolio. Given the exposure to both risks, the tranches are rated to the lower of the two indicative levels.
The market value risk was analyzed by comparing the distance-to-trigger (DTT) metric and distance-from-trigger (DFT) metric to advance rate (AR) ranges (ARs are based on Fitch's analysis of the market dislocation experienced in 2007-2008, which represent a peak to trough decline). The DTT metric indicates the price decline stress that would occur before triggering a liquidation event. The DFT metric shows the additional price decline that would result in a loss for both the class A-1 and A-2 notes (collectively, the class A notes).
In addition, Fitch's analysis includes a categorization of portfolio loan assets generally based on the seniority level of the loan, which is then used to determine the AR thresholds under various rating stresses. For example, a senior secured first lien loan would be classified as Category 2, and the range of ARs applied to a Category 2 asset under a 'B' stress would be 92-96%. This analysis is further supplemented in Fitch's May 2008 commentary, 'Fitch Update: Application of Revised Market Value Structure Criteria to TRR CLOs'.
Based on Fitch's classification of the portfolio assets, the SERVES 2006-1 portfolio is composed of:
--78.7% Category 2 assets;
--17.5% Category 3 assets (second-lien loans, covenant-light loans, revolvers, delayed draw term loans); and
--3.8% Category 4 assets (defaulted assets).
The average advance rate of the current portfolio (as of the Oct. 10, 2010 trustee report) is approximately 90% under a 'B' stress. This would correspond to a market value decline of approximately 10% under a 'B' stress. The market value trigger for the class A notes is in line with Fitch's 'B' advance rates for this structure, with a combined DFT and DTT metric of approximately 29%, up from 19% in the last review. Although the cushion to the liquidation trigger has increased from increasing market prices, there still remains uncertainty of market value risk exposure upon liquidation or termination of the transaction. Therefore, the ratings for the class A notes have been affirmed at 'B' and continue to maintain a Stable Outlook. The class A-1 notes remain undrawn.
As the reference portfolio is comprised of a diverse pool of senior secured loans, the credit risk of the portfolio was also analyzed using the Portfolio Credit Model (PCM), as described in Fitch's Corporate CDO criteria. The par coverage of the class A notes is approximately 30%, which corresponds with a 'AAA' rating loss rate for the portfolio, based on Fitch's PCM analysis. However, this approach was not used to determine the class A notes' ratings as the market value trigger for the class A notes exposes them to additional risk beyond pure credit risk.
Based on the classification of the assets, the market value coverage for the class B notes is below Fitch's 'CCC' advance rate threshold, and the par subordination of the class B notes (approximately 4%), is also below the 'CCC' rating loss rate in Fitch's PCM analysis. Therefore, the rating has been affirmed at 'CC', as default of some kind appears probable.
The class C and D notes have negative market value and par coverage, and are therefore unlikely to see any principal proceeds at maturity. Therefore, they remain at 'C', with default appearing to be inevitable.
SERVES 2006-1 is a total rate of return collateralized loan obligation (CLO) with a market value termination trigger. The transaction closed on Feb. 24, 2006 and is managed by PPM America Inc.
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 & Related Research:
--'Rating Market Value Structures' (March 26, 2010);
--'Fitch Update: Application of Revised Market Value Structure Criteria to TRR CLOs' (May 15, 2008);
--'Global Structured Finance Rating Criteria' (Aug. 24, 2010);
--'Global Rating Criteria for Corporate CDOs' (July 5, 2010).
Applicable Criteria and Related Research:
Rating Market Value Structures
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=507187
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
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