Fitch Downgrades 1 and Affirms 5 Classes of Bernoulli High Grade CDO I, Ltd./Inc.
KEY RATING DRIVERS
The class A-1B notes have been downgraded to 'Bsf' from 'BBsf'. Interest proceeds received by the issuer are currently being used to pay administrative expenses, senior management fees and a portion of payments due under an out-of-the money interest rate swap in which Bernoulli is the fixed-rate payer. Principal proceeds received by the issuer are currently being used to make the remaining payments due to the swap counterparty and all payments of interest due to the class A-1A, A-1B, A-2 and B notes. Any remaining principal proceeds are being used to delever the class A-1B notes. The amount of principal diverted to make these swap payments and to pay interest on these notes has been increasing and will decrease the notes credit enhancement (CE) over time. While the notional amount of the swap will decrease over time through 2021, in a low interest rate environment payments to the swap counterparty may continue to erode CE available to the noteholders. There is also a potential for two remaining synthetic assets currently rated 'Csf' to cause the drawdown of the class A-1B notes in the amount of $14.5 million. While the notes have paid down since Fitch's last rating action leading to higher CE levels, these levels are commensurate with the 'Bsf' rating stress as projected by Fitch Structured Finance Portfolio Credit Model (SF PCM). The Stable Outlook reflects Fitch's view that the notes will continue to delever and that there is sufficient CE to offset potential deterioration of the underlying collateral going forward.
The A-1A, A-2, B, C, and D classes have been affirmed at 'Csf'. The class A-1A, A-2 and B notes are currently receiving full interest payments, however, Fitch does not expect these classes to be paid their stated principal balance by the maturity of the transaction. The class C and D notes have been and will continue to defer interest. Fitch does not expect any future interest or principal payments to the class C and D notes.
Negative migration, defaults beyond those projected, an extension of the weighted average life for the underlying assets, and lower than expected recoveries could lead to downgrades for classes analysed under the SF PCM. Classes already rated 'Csf' have limited sensitivity to further negative migration given their highly distressed rating levels. However, there is potential for non-deferrable classes to be downgraded to 'Dsf' should they experience any interest payment shortfalls. Continuing amortization accompanied by better than expected cash flows from distressed assets could lead to an upgrade.
This review was conducted under the framework described in the reports 'Global Structured Finance Rating Criteria' and 'Global Surveillance Criteria for Structured Finance CDOs'. The transaction was not analysed through the cash flow model framework, as the effect of structural features and excess spread available to amortize the notes were determined to be minimal.
Bernoulli is a hybrid cash and synthetic arbitrage collateralized debt obligation (CDO), which closed on March 30, 2006 and is managed by Threadneedle International Ltd. The current portfolio is composed of approximately 52.4% RMBS and 47.6% of structured finance CDOs.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
No third party due diligence was reviewed in relation to this rating action.
Fitch has downgraded the following class of notes:
--$61,889,804 class A-1B notes to 'Bsf' from 'BBsf'; Outlook Stable.
Fitch has affirmed the following notes:
--$856,376,277 class A-1A notes at 'Csf';
--$86,536,865 class A-2 notes at 'Csf';
--$57,691,243 class B notes at 'Csf';
--$17,623,096 class C notes at 'Csf';
--$20,818,456 class D notes at 'Csf'.
Fitch does not rate the income notes.