Fitch Takes Various Actions on 13 Trust Preferred CDOs
OREANDA-NEWS. Fitch Ratings has affirmed 51, upgraded two, downgraded two, and revised Rating Outlooks on four tranches from 13 collateralized debt obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks.
KEY RATING DRIVERS
Credit Quality of Collateral: For all except two transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores and ratings, remained stable or improved. Two transactions experienced new deferrals since last review.
Collateral Redemptions: Five CDOs received various levels of redemptions that paid down the senior-most notes and increased credit enhancement (CE) levels for rated liabilities. The magnitude of redemptions for each CDO is reported in the accompanying rating action report. Potential upgrades were weighed against the risk of adverse selection in the remaining portfolios, especially those concentrated in fewer performing issuers, and considered in the context of the likely time horizon for the notes' paydown.
Resolution and Recovery of Defaults and Deferrals: The number of cures continued to trend upward, as Fitch reports in its monthly Fitch Bank TruPS CDO Default and Deferral Index report. Fitch assesses the likelihood of a cure for a current deferral based on the score history of a deferring issuer since deferral.
Fitch assumes that 15% of recent cures, defined as curing within the last year, re-defer and are considered weak deferrals to account for observed re-deferrals by some issuers. Total of 25 issuers in nine CDOs has cured in the past 12 months. The percentage of recent cures for each CDO is reported in the accompanying rating action report.
CDO Structure: Excess spread continued to contribute to deleveraging of 10 CDOs from either Optimal Principal Distribution Amount (OPDA) or failing coverage tests. The uplift from the excess spread ranged from none to four notches. For non-deferrable notes, Fitch performs analysis of the notes' interest sensitivity to additional defaults and deferrals. Ratings for non-deferrable notes are capped at the rating stress level corresponding to the magnitude of additional defaults and deferrals that could trigger a missed interest payment.
Performing CE Cap: The ratings on 19 classes of notes in nine transactions have been capped at their current rating level due to the application of performing CE cap as described in 'Surveillance Criteria for TruPS CDOs,' dated April 5, 2016.
The rating on class A-2 note in Preferred Term Securities XI Ltd./Inc. has been downgraded to BBBsf from Asf as its performing CE was below a minimum threshold defined by the criteria for Asf rating category.
The rating on the senior subordinate notes in MM Community Funding III, Ltd./Corp. has been capped below the passing level indicated by the performing CE cap or from the model due to the concentrated nature of the remaining portfolio with only five performing issuers. The note relies on two large performing issuers each representing approximately 30% of the portfolio.
Ratings on class A-1 notes in Regional Diversified Funding 2005-1 Ltd./Corp. have been upgraded to BBsf due to the positive credit migration of the underlying collateral and deleveraging of the capital structure. However, the ratings have been capped below the level indicated by its performing CE due to the risk of interest shortfall to the non-deferrable classes of notes that represent higher than average proportion of the performing collateral compared to other transactions.
Changes in the rating drivers described above could lead to rating changes in the TruPS CDO notes. To address potential risks of adverse selection and increased portfolio concentration Fitch applied a sensitivity scenario, as described in the criteria.
DUE DILIGENCE USAGE
No third party due diligence was reviewed in relation to this rating action.