S&P: Various Actions Taken In FAB UK 2004-1 Cash Flow CDO Transaction Following Review
Specifically, we have:
Raised our ratings on the class A-1E, A-1F, A-2E, and S1 notes;Affirmed our ratings on the class A-3E and A-3F notes; andLowered our rating on the class BE notes (see list below). Today's rating actions follow our updated credit and cash flow analysis of the transaction using data from the July 2016 trustee report, and the application of our relevant criteria (see "Related Criteria").
Similar to our previous review of the transaction, the class A-1E and A-1F notes have continued to amortize as the transaction continues to deleverage (see "Ratings Affirmed In FAB UK 2004-1 Cash Flow CDO Transaction Following Review; Rating Raised On Class S1 Notes," published on June 23, 2015).
At closing, the class S1 notes represented ?10 million of combination notes, which comprise ?7.5 million of class A-1F notes and ?2.5 million of class C subordinated notes. Our rating on the class S1 combination notes addresses the payment of ?7.5 million of principal, of which we calculate an outstanding rated balance of ?1.3 million. Based on the reduction in the outstanding rated balance, our credit and cash flow analysis indicates that the class S1 notes are able to achieve a higher rating. We have therefore raised our rating on this class of notes.
Since our previous review, the class A-1E and A1-F notes have amortized by approximately ?6.8 million, which has increased the available credit enhancement for all classes of notes.
Overall, our analysis indicates that the underlying portfolio's general credit quality has remained relatively stable at the 'BBB' rating category. Despite this, we have seen an increase in the assets rated in the 'CCC' category, with one such asset now representing 5.2% of the outstanding portfolio, up from 1.3% at our previous review.
The portion of performing assets not rated by S&P Global Ratings is 1.7%. In this case, we apply our third-party mapping criteria to map notched ratings from another ratings agency and to infer our rating input for the purpose of inclusion in CDO Evaluator (see "Mapping A Third Party's Internal Credit Scoring System To Standard & Poor's Global Rating Scale," published on May 8, 2014). In performing this mapping, we generally apply a three-notch downward adjustment for structured finance assets that are rated by one rating agency and a two-notch downward adjustment if the asset is rated by two rating agencies.
Taking into account the ratings on the portfolio, our credit analysis indicates that our scenario default rates (SDRs)--the level of defaults that we expect the transaction to incur at the respective rating levels--have decreased since our previous review at all levels except for the 'AAA' and 'AA+' levels.
The class A overcollateralization test is now passing.
We conducted our cash flow analysis to determine the break-even default rate (BDR) for each rated class of notes. 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. We used the portfolio balance that we consider to be performing, the reported weighted-average spread, and the weighted-average recovery rates that we considered to be appropriate. We incorporated various cash flow stress scenarios using our shortened and additional default patterns and levels for each rating category assumed for each class of notes, combined with different interest stress scenarios as outlined in our criteria (see "Global CDOs Of Pooled Structured Finance Assets: Methodology And Assumptions," published on Feb. 21, 2012, and "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Aug. 8, 2016).
Overall, our credit and cash flow results indicate that the available credit enhancement for the class A-1E, A-1F, and A-2E notes is commensurate with higher ratings than those currently assigned. We have therefore raised our ratings on these classes of notes.
Our analysis also indicates that the available credit enhancement does not support our current ratings on the class A-3E and A-3F notes. However, the current BDR is still positive. We have therefore affirmed our 'CCC - (sf)' ratings on these classes of notes in line with our criteria for assigning 'CCC' category ratings (see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published on Oct. 1, 2012).
At the same time, we have lowered to 'CC (sf)' from 'CCC - (sf)' our rating on the class BE notes as the available credit enhancement is not commensurate with the currently assigned rating.
FAB UK 2004-1 is a cash flow mezzanine structured finance collateralized debt obligation (CDO) transaction that closed in April 2004.