Fitch Upgrades Panther CDO IV B. V. Notes
Class A1 (ISIN XS0276065124) upgraded to 'AA+sf' from 'Asf'; Outlook Stable
Class A2 (ISIN XS0276066361) upgraded to 'AA+sf' from 'BBBsf'; Outlook Stable
Class B (ISIN XS0276068730) upgraded to 'BBBsf' from 'Bsf'; Outlook Positive
Class C (ISIN XS0276070553) upgraded to 'Bsf' from 'CCCsf'; Outlook Stable
Panther CDO IV B. V. is a managed cash arbitrage securitisation of a diverse pool of assets, including high-yield bonds, asset-backed securities, senior loans and second lien loans. The portfolio is managed by M&G Investment Management Limited.
KEY RATING DRIVERS
The upgrades reflect increases in credit enhancement (CE) across the capital structure and a decrease in fixed-rate assets over the past 12 months, thereby significantly reducing the interest rate mismatch between the underlying assets and liabilities. The Positive Outlook on the class B notes reflects potential further upgrades if deleveraging continues at the current rapid pace.
Credit enhancement has increased on the class A1 to 70% from 49%, on the class A-2 notes to 46% from 32%, on the B notes to 26% from 19% and on the class C notes to 12% from 10% during the past year. The increase in CE was mainly driven by assets sales and prepayment.
The manager sold approximatively EUR35.5m worth of assets over the last 12 months. The sales were concentrated in fixed-rate bonds with a weighted average selling price above par. As a result, the manager has built approximatively EUR0.5m of additional par in the transaction. In addition, approximatively EUR28m of principal proceeds were received due to prepayment.
The trading activity also resulted in a decrease in fixed-rate asset exposure. As of the September 2016 investor report, fixed-rate assets represented EUR8.3m, down from EUR30.9m a year ago. The decrease in fixed-rate asset exposure is particularly beneficial for the floating-rate liability structure. Class A1 and A2 notes are now able to pay timely interest under Fitch's rising interest rate stress scenario and the ratings are no longer constrained by the timeliness of interest payment.
However, the ratings of the class A1 and A2 notes are capped to 'AA+sf', in line with the rating cap for Italian and Spanish structured finance transactions due to the exposure of the transaction to these jurisdictions. Peripheral assets currently represent approximatively 23.5% of the performing portfolio and may increase further as the portfolio amortises. These assets are concentrated in the ABS sub-portfolio with a long expected maturity date.
The transaction is increasingly exposed to high concentration risk, particularly in the ABS sub-portfolio. Given the uncertainty on ABS amortisation profile Fitch decided to stress the maturity date of the large obligors in the ABS sub-portfolio to their legal maturity date. This approach introduces a variation to Fitch's Global Surveillance Criteria for Structured Finance CDOs leading to a rating lower by one category for the class B notes. The portfolio concentration has increased over the last 12 months, with the largest and top ten obligors representing respectively 5.7% and 40.2% as of the September 2016 investor report.
Until the payment date in September 2016, the transaction had a macro interest rate swap in place where the issuer was paying a fixed rate in exchange of Euribor 6 months. Given the current low interest rate environment, the issuer was making a substantial payment to the hedge counterparty on each payment date. The transaction is also paying deferred placement fee until the payment date in March 2017. Following the maturity of the interest rate swap and full repayment of the deferred placement fees, Fitch expects available excess spread to increase.
The portfolio is a combination of ABS assets and leveraged loans and high-yield bonds. The proportion of ABS assets has increased to approximatively 60% of the performing portfolio from 50% over the last 12 months. Asset performance has been broadly stable over the last 12 months. The Fitch-weighted average rating factor, as reported by the trustee, increased to 15.23 from 14.77 during the same period, reflecting slight deterioration in the credit quality of the performing portfolio. Defaults currently stand at EUR30m, up from EUR25m a year ago.
Fitch found that reducing the recovery rate or increasing the default rate by 25% each would not have any impact on the ratings of the notes
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO RULE 17G-10
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. There were no findings that were material to this analysis. Fitch has not reviewed the results of any third party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
The majority of the underlying assets have ratings or credit opinions from Fitch and/or other Nationally Recognised Statistical Rating Organisations and/or European Securities and Markets Authority registered rating agencies. Fitch has relied on the practices of the relevant Fitch groups and/or other rating agencies to assess the asset portfolio information.
Overall, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis:
-Investor report as of 12 September 2016 provided by The Bank of New York Mellon
-Loan-by-loan data of 12 September 2016 provided by The Bank of New York Mellon