Fitch Downgrades 2 Classes of Rosemont CLO Ltd./Corp; Assigns LS Ratings & Revises Outlooks

November 11, 2009 10:49 AM EST

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed three and downgraded two classes of notes issued by Rosemont CLO Ltd./Corp (Rosemont CLO). A detailed list of rating actions follows at the end of this press release.

This review was conducted under the framework described in the report 'Global Structured Finance Rating Criteria'. Cash flow and portfolio default modeling were conducted in accordance with Fitch's 'Global Criteria for Cash Flow Analysis in Corporate CDOs' and 'Global Rating Criteria for Corporate CDOs'.

The affirmations are the result of the credit enhancement available to the classes A, B-1, and B-2 notes relative to the observed and expected performance of the underlying loan portfolio. The senior notes have benefited from significant collateral amortization, as the class A notes have received over 70% of their initial principal balance since the closing date. The relative priority of the class B-1 and B-2 notes has improved due to the significant amortization of the class A notes above them, helping to mitigate the deteriorating performance of the underlying collateral.

Structural features of the transaction, such as the application of excess spread to redeem the notes in order of priority should an overcollateralization (OC) test fail, also serve to protect the higher-priority classes. Rosemont CLO is currently in compliance with all coverage tests, although the class D OC test was only passing at a level of 101.6% versus a trigger of 101.5% as of the Oct. 6, 2009 trustee report. The calculations of the OC tests do not incorporate ratings-based principal haircuts, such as an excess 'CCC' adjustment. In Fitch's opinion, the class D notes would likely be considered undercollateralized if ratings-based haircuts were applied.

The downgrades to the classes C and D notes are due to the collateral deterioration experienced since Fitch's last rating review in February 2009. Defaulted assets, excluding those that the portfolio manager expects to resume cash flows after restructuring in the near term, currently account for 13.5% of the portfolio. This represents a marked increase from 6.3% at Fitch's last rating review. Additionally, Fitch considers 27.1% of the performing portfolio to be rated 'CCC+' or below, up from 18.8% at the last review. It is probable that the deteriorated portfolio performance will lead to some principal impairment for the class D notes. Although a degree of credit enhancement remains for the class C notes, the rapid deterioration of the portfolio and below-average recovery rates have negatively affected the credit profile of these notes.

In its review, Fitch analyzed the structure's sensitivity to ongoing softness in U.S. corporate recoveries. To accomplish this, Fitch reduced its average recovery rate assumptions for each asset type by 30% in one sensitivity scenario and by 50% in a second sensitivity scenario where explicit Recovery Ratings were not available. The class A notes displayed solid performance in both of these scenarios and have therefore been assigned a Stable Outlook. The classes B-1, B-2, and C notes displayed greater degrees of sensitivity to lower recovery rates. In addition, approximately 35% of the underlying portfolio ratings currently have a Negative Outlook, which may result in additional future rating volatility. For these reasons, the classes B-1, B-2, and C notes have been assigned Negative Outlooks.

The classes A, B-1, B-2, and C notes were each assigned a Loss Severity (LS) rating. The LS ratings indicate each tranche's potential loss severity given default, as evidenced by the ratio of tranche size to the base-case loss expectation for the collateral, as explained in Fitch's 'Criteria for Structured Finance Loss Severity Ratings' report. The LS rating should always be considered in conjunction with the probability of default indicated by a class' long-term credit rating. Fitch does not assign LS ratings to tranches rated in the 'CCC' to 'C' categories.

Rosemont CLO is a cash flow collateralized loan obligation (CLO) that closed on Jan. 8, 2002 and is managed by Deerfield Capital Management LLC. The transaction's reinvestment period ended in January 2007. The portfolio is composed of 97.4% senior secured loans and 2.6% junior secured loans.

Fitch Ratings has taken the following rating actions on the following notes. Rating actions include affirmations, downgrades, assignment of Loss Severity (LS) ratings and Rating Outlooks.

--$69,013,726 class A notes affirmed at 'AAA/LS3'; Outlook Stable;

--$18,000,000 class B-1 notes affirmed at 'A/LS3'; Outlook to Negative from Stable;

--$7,000,000 class B-2 notes affirmed at 'A/LS3'; Outlook to Negative from Stable;

--$13,200,000 class C notes downgraded to 'B/LS4' from 'BBB+'; Outlook Negative;

--$12,000,000 class D notes downgraded to 'CC' from 'CCC'.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

--'Global Structured Finance Rating Criteria' (Sept. 30, 2009);

--'Global Rating Criteria for Corporate CDOs' (April 30, 2008);

--'Global Criteria for Cash Flow Analysis in Corporate CDOs' (April 30, 2008);

--'Criteria for Structured Finance Loss Severity Ratings' (Feb. 17, 2009).

Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are also available at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

    Source: Fitch Ratings

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