S&P: Ratings Raised On ACA Euro CLO 2007-1's Class C And D Notes Due To Higher Credit Enhancement; Other Ratings Affirmed
Today's rating actions follow our assessment of the transaction's performance using data from the July 2016 trustee report.
We subjected the capital structure to a cash flow analysis to determine the break-even default rate (BDR) for each rated class at each rating level. The BDR represents our estimate of the maximum level of gross defaults, based on our stress assumptions, that a tranche can withstand and still fully repay the noteholders. In our analysis, we used the portfolio balance that we consider to be performing (€71,475,854), the current weighted-average spread (3.53%), and the weighted-average recovery rates calculated in line with our corporate collateralized debt obligation (CDO) criteria (see "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2015). We also noted the significant reported cash balance (€11,789,344). We applied various cash flow stresses, using our standard default patterns, in conjunction with different interest rate and currency stress scenarios.
Since our March 2016 review, the aggregate collateral balance has decreased by €19.5 million to €83.3 million (see "Ratings Raised On ACA Euro CLO 2007-1's Senior Notes Due To Higher Credit Enhancement; Other Ratings Affirmed"). The class B notes--now the senior most class of notes outstanding--have continued to amortize, and the available credit enhancement has increased for all of the rated classes of notes, except for the class E notes due to the transaction's structural deleveraging. Today's upgrades of the class C and D notes reflect this increased available credit enhancement.
Due to a change in the portfolio composition, we have observed changes in the weighted-average recovery rates since our previous review, however the weighted-average spread on the underlying portfolio assets has remained relatively stable at 353 basis points (bps), from 350 bps. The portfolio's average credit quality has remained stable at 'B+' since our previous review, while its weighted-average life has decreased to 4.45 years from 4.77 years. The obligor concentration risk has continued to increase due to portfolio deleveraging, with only 17 performing obligors, down from 22 in our previous review.
The issuer has entered into euro-denominated currency option hedges with UBS AG (London Branch) to hedge any resultant currency risk from non-euro-denominated assets (5.07% of the portfolio balance). The documented downgrade provisions in these currency option contracts do not fully comply with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). We have therefore applied currency stresses on these non-euro assets to test the effect on the ratings on the class B and C notes--rated above the rating on the counterparty--if the counterparty failed to perform.
The results of our credit and cash flow analysis and the application of our current counterparty and nonsovereign ratings criteria indicate that the available credit enhancement for the class B notes is commensurate with the currently assigned rating (see "Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions," published on June 14, 2011). We have therefore affirmed our 'AAA (sf)' rating on the class B notes.
The results of our analysis indicate that the available credit enhancement for the class C notes is commensurate with a higher rating than currently assigned. We have therefore raised to 'AAA (sf)' from 'AA+ (sf)' our rating on the class C notes.
Our ratings on the class D and E notes are constrained by the application of the largest obligor default test, a supplemental stress test that we outline in our corporate CDO criteria. This assesses whether a CDO tranche has sufficient credit enhancement to withstand specified combinations of underlying asset defaults, based on the ratings on the underlying assets. The test assumes a flat recovery of 5%.
Although our cash flow analysis indicates that the class D and E notes can support higher ratings than those currently assigned (due to the increased available credit enhancement), the largest obligor default test caps our ratings on these classes of notes. We have therefore raised to 'BBB+ (sf)' from 'BB+ (sf)' our rating on the class D notes and have affirmed our 'B+ (sf)' rating on the class E notes.
ACA Euro CLO 2007-1 is a cash flow collateralized loan obligation (CLO) transaction that securitizes loans to primarily speculative-grade corporate firms. The transaction closed in June 2007 and its reinvestment period ended in June 2014. The portfolio is managed by KKR Credit Advisors (Ireland).