Fitch Ratings has upgraded one class, affirmed six classes, and revised the Outlooks on three classes of notes issued by Putnam Structured Product CDO 2001-1, Ltd. (Putnam 2001-1). The rating actions are as follows:
--$15,693,123 class A-1MM-a notes affirmed at 'A+sf', Outlook revised to Positive from Stable;
--$14,011,717 class A-1MM-b notes affirmed at 'A+sf', Outlook revised to Positive from Stable;
--$29,424,606 class A-1SS notes affirmed at 'A+sf', Outlook revised to Positive from Stable;
--$33,708,716 class A-2 notes upgraded to 'BBBsf' from 'BBsf', Outlook Stable;
--$24,000,000 class B notes affirmed at 'CCsf';
--$8,758,096 class C-1 notes affirmed at 'Csf';
--$10,055,691 class C-2 notes affirmed at 'Csf'.
This review was conducted under the framework described in the report 'Global Rating Criteria for Structured Finance CDOs' using the Structured Finance Portfolio Credit Model (SF PCM) for projecting future default levels for the underlying portfolio. These default levels were then compared to the breakeven levels generated by Fitch's cash flow model of the CDO under various default timing and interest rate stress scenarios, as described in the report 'Global Criteria for Cash Flow Analysis in CDOs' for the class A-1MM-a, A-1MM-b, A-1SS (together, class A-1) and class A-2 notes.
Fitch also conducted a sensitivity scenario analysis because the interest rate swap counterparty to the transaction, AIG Financial Products Corp. (AIG) (rated 'BBB', Outlook Positive by Fitch as of Feb. 3, 2012), does not meet Fitch's counterparty criteria, titled 'Counterparty Criteria for Structured Finance Transactions'. Fitch considered the impact of a hypothetical default by the counterparty, assuming that the swap will not be terminated by the issuer. The CDO continues to pay its side of the swap until the expiration in August 2013, but does not receive payment from the counterparty. The results of this scenario indicate that the class A-1 and class A-2 notes have sufficient credit enhancement levels to endure the hypothetical counterparty default under the relevant rating stresses.
Since Fitch's last review in May 2011, the credit quality of the collateral has deteriorated slightly with approximately 19.5% of the portfolio downgraded a weighted average of 2.2 notches and 4.3% of the portfolio upgraded a weighted average of 1 notch. Approximately 30.4% of the portfolio has a Fitch derived rating below investment grade and 18.5% has a rating in the 'CCC' rating category or lower, compared to 27% and 12.5% respectively, at last review.
The affirmation of the class A-1 notes reflects the deleveraging of the capital structure being offset by the negative migration of the underlying collateral. Due to the failing class A/B overcollateralization tests, all principal amortization and excess interest proceeds have been used to reduce the outstanding class A-1 note balance. Inverse floaters represent 7.8% of the portfolio, and due to the current low interest rate environment, have been meaningfully contributing to the interest collections. On the most recent payment date, interest from the inverse floaters comprised 25.5% of all interest proceeds. While the transaction has benefited from this, this cash flow stream is expected to diminish in a rising interest rate scenario as well as due to the amortization of the assets. Since the last review, the class A-1 notes have received $27.8 million of principal payments, or 31.9% of the notes balance at last review. While the breakeven levels for the class A-1 notes indicate it is able to withstand higher rating stresses than 'A+' in the base and sensitivity scenario analyses, the class is not upgraded because AIG's rating does not meet Fitch's counterparty criteria for a class rated 'A+sf', precluding upgrading to a higher rating category at this time.
The Outlook for the class A-1 notes has been revised to Positive from Stable to reflect Fitch's view that the notes will further benefit from continued amortization due to failing coverage tests and the expiration of the interest rate swap in August 2013.
The class A-2 notes have also benefited from the amortization of the A-1 notes as the credit enhancement for the notes has increased. While the cash flow modeling results vary across different interest rate and default timing scenarios, Fitch believes the notes are consistent with a 'BBB' rating and have subsequently upgraded the notes to this rating level.
The Outlook on the class A-2 notes remains Stable to reflect Fitch's expectation that the notes have sufficient credit enhancement to offset potential deterioration of the transaction's underlying collateral going forward. Fitch does not assign outlooks to classes rated 'CCC' or below.
Breakeven levels for the class B and class C-1 and C-2 (together, class C) notes indicate ratings below SF PCM's 'CCC' default level, which is the lowest level of defaults projected by SF PCM. Fitch analyzed these classes by comparing the respective credit enhancement levels for each class to the expected losses from the distressed and defaulted assets in the portfolio (rated 'CCsf' or lower). This comparison indicates that default appears to be probable for the class B notes, and inevitable for the class C notes at or prior to maturity. As of the most recent distribution date, the class B notes continue to receive timely interest and the class C notes continue to pay in kind.
Putnam 2001-1 is a cash flow structured finance collateralized debt obligation (SF CDO) that closed on Nov. 30, 2001. The portfolio is monitored by Putnam Advisory Company, LLC and is comprised of 33.3% commercial and residential real estate investment trusts, 21.5% residential mortgage-backed securities, 19.1% corporate bonds, 13.6% commercial mortgage-backed securities, 6.0% SF CDOs, 4.1% corporate CDOs, and 2.3% commercial and consumer asset-backed securities from 1995 through 2006 vintage transactions.
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 issuer, periodic trustee 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 Structured Finance CDOs' (Oct. 6, 2011);
--'Global Criteria for Cash Flow Analysis in CDOs' (Sept. 15, 2011);
--'Criteria for Interest Rate Stresses in Structured Finance Transactions' (March 20, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (March 12, 2012);
--'Counterparty Criteria for Structured Finance Transactions: Derivative Addendum' (March 12, 2012).
Applicable Criteria and Related Research:
Global Structured Finance Rating Criteria
Global Rating Criteria for Structured Finance CDOs
Global Criteria for Cash Flow Analysis in CDOs
Criteria for Interest Rate Stresses in Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions: Derivative Addendum
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