S&P: ALM VII (R) Ltd. And ALM VII (R)-2 Ltd. Ratings Raised On Eight Classes; Four Ratings Affirmed
Today's rating actions follow our review of the transactions' performances using data from their respective August 2016 trustee reports.
The upgrades primarily reflect the significant paydowns to the respective class A-1 notes of both transactions since our February 2014 effective date rating actions. These paydowns resulted in improved reported overcollateralization (O/C) ratios since the November 2013 effective date reports for both transactions, which we used for our previous rating actions.
For example, the class A overcollateralization (O/C) ratio calculated for ALM VII (R) Ltd. has increased to 146.77% as of the August 2016 trustee report from 140.19% as of the November 2013 effective date report, while the class A O/C ratio for ALM VII (R)-2 Ltd. also increased to 146.60% from 140.17% using the trustee reports as of the same dates. The O/C ratios have increased for all classes of both transactions since our effective date analysis.
The collateral portfolios' credit quality (for both transactions) have slightly deteriorated since our last rating actions. Collateral obligations with ratings in the 'CCC' category have increased as of the August 2016 trustee reports, compared with the November 2013 effective date reports. This played a role in the decline of the weighted average ratings of both portfolios during this period to 'B' from 'B+'. However, despite the slightly larger concentrations in 'CCC' category collateral, both transactions have benefited from a decrease in the weighted average life of the respective portfolios due to the underlying collaterals' seasoning.
The upgrades reflect the improved credit support at the prior rating levels. The affirmed ratings reflect our view that the credit support available is commensurate with the current rating levels.
Although our cash flow analysis indicated higher ratings for the class C, D, and E notes of both transactions, our rating actions considered the increase in both transactions' exposures to 'CCC' assets and the decline in both portfolios' credit quality. In addition, the ratings reflect additional sensitivity runs that considered the both exposures to specific distressed industries.
Our review of these transactions included a cash flow analysis, based on the portfolios and transactions as reflected in the aforementioned trustee reports, to estimate future performance. In line with our criteria, our cash flow scenarios applied forward-looking assumptions on the expected timing and pattern of defaults, and recoveries upon default, under various interest rate and macroeconomic scenarios. In addition, our analysis considered the transactions' ability to pay timely interest and/or ultimate principal to each of the rated tranches. The results of the cash flow analysis demonstrated, in our view, that all of the rated outstanding classes have adequate credit enhancement available at the rating levels associated with these rating actions.
We will continue to review whether, in our view, the ratings assigned to the notes remain consistent with the credit enhancement available to support them, and will take rating actions as we deem necessary.