Fitch Ratings has upgraded six classes of notes issued by Baker Street II Ltd./Corp. (Baker Street II) as follows:
--$263,802,662 class A-1 notes to 'AAAsf' from 'AAsf'; Outlook Stable;
--$29,311,407 class A-2 notes to 'AAAsf' from 'AAsf; Outlook Stable;
--$20,100,000 class B notes to 'AAsf' from 'Asf'; Outlook Stable;
--$21,000,000 class C notes to 'BBBsf' from 'BBsf'; Outlook Stable;
--$15,900,000 class D notes to 'BBsf' from 'Bsf'; Outlook Stable;
--$11,402,275 class E notes to 'Bsf' from 'CCCsf'; assign Outlook Stable.
The upgrades are based on the improved credit enhancement available to the rated notes, the stable performance of the portfolio, and the proximity to the end of the reinvestment period. Fitch maintains and or assigns a Stable Outlook to the notes reflecting its expectation of stable rating performance over the next one to two years.
Since Fitch's last review, the credit quality of the portfolio has been maintained at 'B+/B' and exposure to assets considered 'CCC' or below by Fitch is 9.1%, down from 11.3%. One new asset has defaulted, marginally increasing defaults to 3.1% from 3.0%. Baker Street II is still in its reinvestment period through October 2012, and the portfolio continues to be actively traded. As of the March 2012 trustee report, all overcollateralization (OC) and interest coverage IC) tests and portfolio concentration limitations are within the permissible limits. In 2009, the class A and E notes were partially redeemed due to the failure of the class D and E OC tests. The failure of the class E OC test during the reinvestment period diverts interest proceeds to amortize the class E principal initially, including capitalized interest, prior to paying principal distributions to the class A-D notes sequentially. Additionally, Baker Street II has a class E reinvestment test which diverts 60% of excess interest that would be paid to the equity, to instead purchase additional collateral for the portfolio.
This review was conducted under the framework described in the report 'Global Rating Criteria for Corporate CDOs' using the Portfolio Credit Model (PCM) for projecting future default and recovery levels for the underlying portfolio. These default and recovery levels were then utilized in Fitch's cash flow model under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs'. The cash flow model was customized to reflect the transaction's structural features. Fitch's portfolio and cash flow analysis indicate that the credit quality for all classes of the notes has improved.
Baker Street II is a revolving cash flow transaction collateralized by a portfolio of primarily leveraged loans that closed on Sept. 15, 2006 and is managed by Seix Investment Advisors LLC (Seix). Baker Street II's portfolio is currently comprised of 97.2% senior secured obligations and 2.8% second lien loans and unsecured obligations. Approximately 10.8% of the portfolio consists of covenant lite loans. If a covenant lite loan issuer defaults, there is a potential that reduced recovery proceeds could materialize. To account for this risk, Fitch applied a 10% recovery rate haircut to the covenant lite loans that do not carry a Fitch explicit Recovery Rating. The stated maturity of the transaction is Oct. 15, 2019.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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. 4, 2011);
--'Global Rating Criteria for Corporate CDOs' (Aug. 10, 2011);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012).
Applicable Criteria and Related Research:
Global Rating Criteria for Corporate CDOs
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Global Structured Finance Rating Criteria
Primary Surveillance Analyst
Joyce Fargas, +1-212-908-0824
One State Street Plaza
New York, NY 10004
Derek Miller, +1-312-368-2076
Sandro Scenga, +1-212-908-0278 (New York)