Fitch Ratings has affirmed 50 tranches and upgraded 18 from 16 Trust Preferred (TruPS) Collateralized Debt Obligations (CDOs) backed by bank collateral. In addition, Fitch has assigned various Rating Outlooks.
The rating action report, titled 'Fitch Takes Various Rating Actions on 16 TruPS CDOs', dated Aug. 06, 2012, details the individual rating actions for each rated CDO. It can be found on Fitch's website at www.fitchratings.com' by performing a title search or by using the link below. For further information and transaction research, please refer to 'www.fitchratings.com'.
The key rating factors for today's rating actions are highlighted below.
Credit Quality of Collateral: For most of the transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores and ratings, remained stable or improved. The number of new deferrals and defaults has come down since the elevated levels of 2009 and 2010, as well as compared to the first half of 2011.
Collateral Redemptions: Most of these transactions benefited from the paydowns to the most senior classes outstanding, due to the TruPS redemptions and excess spread. In many transactions, the underlying TruPS have reached the end of their non-call period, which Fitch believes contributed to some early redemptions. In addition, the phase-out of Tier I status for TruPS of banks with assets at or over $15 billion by 2016 will likely continue to contribute to the early redemptions by the affected issuers in the next couple of years.
To account for a potential adverse selection and increased portfolio concentration after likely redemptions by the issuers with asset size exceeding $15 billion, Fitch applied a sensitivity scenario, in addition to the base case, as described in the criteria 'Global Surveillance Criteria for TruPS CDOs,' dated July 11, 2012. A higher weight was attributed to the outcome of the sensitivity scenario for some notes which are expected to remain outstanding for an extended period of time. These notes were passing at higher rating levels in the base case scenario but are exposed to a potential adverse selection and concentration in the longer term, as indicated by the results of the sensitivity scenarios. This risk could lead to a rating volatility which is inconsistent, in the credit committee's view, with high investment grade rating levels.
The recently published 'Basel III' Notice of Proposed Rulemaking (NPR) proposed a gradual phase-out of the Tier I status for TruPS issued by banks and thrifts with assets at or over $500 million, with a complete phase-out by 2022. Given that this NPR is still subject to public comment, Fitch does not factor the impact of this proposed regulation into this rating action. Fitch will continue to monitor further development of the proposed rules and evaluate its implications on the assumptions regarding early redemptions.
Excess Spread and CDO Structure: In most of the transactions, interest proceeds continued to be redirected to pay down senior outstanding classes of notes. However, due to deleveraging and cures, in some transactions, senior coverage tests that were failing at last review are now passing. While this is a reflection of the positive trends noted above, this is a negative factor for the senior classes going forward. Overall, the levels of excess spread used to deleverage the structure over the last several years contributed meaningfully to the increased credit enhancement levels for the senior classes.
Resolution and Recovery of Defaults and Deferrals: The number of cures has been trending upwards, with 69 cures at the end of June as compared to 28 at the same time last year. As described in the 'Global Surveillance Criteria for Trust Preferred CDOs', Fitch assesses the likelihood of a cure for a current deferral based on the score history of a deferring issuer since deferral. Current 'strong' deferrals are assigned a higher likelihood of cure than 'weak' deferrals. For this review, the majority of current deferrals were considered to be 'weak', based on their recent score history.
Rating rationale for the rating actions for each CDO is provided below.
Credit migration statistics are provided as percentage of the collateral balance at last review. All other statistics are expressed as percentage of the current collateral balance as per the most recent trustee report available for this rating action.
MMCapS Funding XIX, Ltd./Corp.
The credit quality of the portfolio has improved with 26% of the portfolio upgraded (including 7.8% of new cures) and 7.3% downgraded. Though the portfolio has experienced two new deferrals (2.3% of the current portfolio), this has been offset by the improvement in the overall credit quality of the portfolio since the last review. Additionally, $4 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes.
MM Community Funding Ltd./Corp.
The portfolio has improved with 12.2% of the portfolio upgraded (including 7.3% of new cures) and 4.9% downgraded. The portfolio has experienced no new deferrals or defaults. Additionally, $16 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes. Despite these positive factors, the risk of an interest shortfall to the class A note remains. The CDO is expected to use the funds in its reserve account to pay interest to the class B notes. The current balance in the reserve account is $5.7 million. Should the reserve account be depleted and any additional deferrals occur, there may not be sufficient proceeds to service the class A's interest.
MM Community Funding III, Ltd./Corp.
A full redemption of a $25 million previously defaulted TruPS and some positive credit migration outweighed one new default on a $10 million TruPS and downgrades in the portfolio. Credit enhancement levels increased due to the payment from the defaulted TruPS mentioned earlier. There were no new cures or deferrals since last review.
Preferred Term Securities I, Ltd./Inc.
The credit quality of the collateral has improved with 22.5% of portfolio upgraded (including 9.9% of new cures) and only 7.1% downgraded from last review. There were no new defaults or deferrals in the portfolio since the last review. Additionally, $31.5 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes. The senior overcollateralization (OC) and interest coverage (IC) tests, failing at last review, are passing now.
Preferred Term Securities II, Ltd./Inc.
The credit quality of the collateral has improved with 16.1% of portfolio upgraded (including 1.7% of new cures) and 1% downgraded. Though there were two new defaults, this was offset by the improvement in the overall credit quality of the portfolio. Additionally, $73.2 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes. The senior OC, failing at last review, is passing now.
Preferred Term Securities IV, Ltd./Inc.
There were no new defaults, deferral, cures or collateral redemptions in this portfolio since last review. Therefore the credit enhancement remained unchanged at 37.4%. The credit quality of the collateral has improved with 30% of the portfolio upgraded and no downgrades since the last review.
Preferred Term Securities VII, Ltd./Inc.
Since the last review 9.5% of the portfolio (including 4.1% of new cures) was upgraded, offsetting negative migration in the portfolio. The portfolio has experienced no new deferrals or defaults. Additionally, a $6 million FHLMC Strip that was in the reserve account matured in July 2012 and will be used to pay down the senior notes at the next payment date.
Preferred Term Securities VIII, Ltd./Inc.
The credit quality of the portfolio has improved with 14.1% of the portfolio upgraded and only 4.1% downgraded. Though the portfolio has experienced one new deferral, this has been offset by the improvement in the overall credit quality of the portfolio since the last review. Additionally, $6 million of redemptions have de-levered the senior notes, increasing credit enhancement for all the classes.
Preferred Term Securities IX, Ltd./Inc.
The credit quality of the collateral has improved with 23.3% of portfolio upgraded (including 2.1% of new cures) and 4.7% downgraded. Though there were two new deferrals (1.7% of the current portfolio), this was offset by the improvement in the overall credit quality of the portfolio. Additionally, $17.64 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the Classes.
Preferred Term Securities X, Ltd./Inc.
The credit quality of the portfolio has improved with 21.5% of the portfolio upgraded (including 9.4% of the new cures) and 6.2% downgraded. The portfolio has experienced no new deferrals or defaults. Additionally, $25.97 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes.
Preferred Term Securities XI, Ltd./Inc.
The credit quality of the portfolio has improved with 28.5% upgraded and 1.6% downgraded. Though the portfolio has experienced two new deferrals (1.4% of the current portfolio), this has been offset by the improvement in the overall credit quality of the portfolio. Additionally, $15 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes. The senior OC test, failing at last review, cured at the June 2012 payment date.
Preferred Term Securities XII, Ltd./Inc.
The credit quality of the portfolio has improved with 12% of the portfolio upgraded (including 2.8% of new cures) and 4.5% downgraded. Though the portfolio has experienced one new default (1.2% of the current portfolio), this has been offset by the improvement in the overall credit quality of the portfolio since the last review. Additionally, $72 million of redemptions has de-levered the senior notes, whereby increasing credit enhancement for all the classes. The senior OC test, which was failing at last review, cured at the March 2012 payment date.
Preferred Term Securities XIII, Ltd./Inc.
The credit quality of the portfolio has slightly improved with 25.5% of the portfolio upgraded and 9.6% downgraded. The portfolio has also experienced four new deferrals (6.6% of the current portfolio). Additionally, $10 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes.
Preferred Term Securities XIV, Ltd./Inc.
The credit quality of the portfolio has slightly improved with 20.5% of the portfolio upgraded (including 0.9% of new cures) and 9.2% downgraded. The portfolio has experienced four new deferrals (3.9% of the current portfolio). Additionally, $0.97 million of redemptions has de-levered the senior notes, increasing credit enhancement for all the classes.
Regional Diversified Funding 2005-1 Ltd./Corp.
The credit quality of the portfolio has remained relatively stable with no new defaults, deferrals or cures since the last review. All notes continue to be reliant on distressed collateral to perform.
Soloso CDO 2007-1 Ltd./Corp.
Though the Class A-1LA and A-LB (collectively, Class A-1) notes received their timely interest payment at the last payment date, 90.7% of the periodic interest due to the class A-1 notes came from principal proceeds. Interest proceeds have not been sufficient to cover full interest due for the notes on several payment dates over the past year and the notes are likely to experience another shortfall. All other classes are currently capitalizing interest and are reliant on distressed collateral to perform.
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 trustee reports, collateral manager reporting Web sites and the public domain.
Applicable Criteria and Related Criteria:
--'Global Surveillance Criteria for Trust Preferred CDOs' (July 11, 2012);
--'Global Rating Criteria for Corporate CDOs' (August 10, 2011);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions'(August 02, 2012);
--Bank TruPS CDO Default and Deferral Index as Of June 2012 (July 25, 2012).
Applicable Criteria and Related Research: Fitch Takes Various Actions on 16 Bank TruPS CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686095
Fitch Bank TruPS CDO Default and Deferral Tables (As of June 2012)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684340
Criteria for Rating Caps in Global Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684737
Counterparty Criteria for Structured Finance Transactions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=678938
Global Rating Criteria for Corporate CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=641789
Global Surveillance Criteria for Trust Preferred CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682013
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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
Primary Analyst:
Cristina Feracota,
+1-312-368-2300
Analyst
Fitch, Inc.
70 W. Madison Street
Chicago,
IL 60602
or
Committee Chairperson:
Alina Pak,
+1-312-368-3184
Senior Director
or
Media Relations:
Sandro
Scenga, New York, +1-212-908-0278
sandro.scenga@fitchratings.com