Fitch Affirms All Classes of Three Dekania Europe CDOs

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the ratings on all classes of notes from three Dekania European collateralized debt obligations (CDOs) as follows:

Dekania Europe CDO I P.L.C. (Dekania Europe I)

--EUR65,659,798 class A1 notes at 'AAsf'; Outlook Stable;

--EUR11,500,000 class A2 notes at 'Asf'; Outlook Stable;

--EUR13,000,000 class A3 notes at 'Asf'; Outlook Stable;

--EUR35,000,000 class B1 notes at 'BBsf'; Outlook Stable;

--EUR15,000,000 class B2 notes at 'BBsf'; Outlook Stable;

--EUR29,500,000 class C notes at 'B-sf'; Outlook Stable;

--EUR15,461,821 class D notes at 'CCCsf'.

Dekania Europe CDO II P.L.C. (Dekania Europe II)

--EUR98,992,442 class A1 notes at 'Asf'; Outlook Stable;

--EUR25,000,000 class A2-A notes a 'BBBsf'; Outlook Stable;

--EUR5,000,000 class A2-B notes at 'BBBsf'; Outlook Stable;

--EUR26,515,950 class B notes at 'BBsf'; Outlook Stable;

--EUR29,496,733 class C notes at 'Bsf'; Outlook Stable;

--EUR14,430,252 class D1 notes at 'CCsf';

--EUR2,720,445 class D2 notes 'CCsf';

--EUR16,638,778 class E notes 'Csf'.

Dekania Europe CDO III P.L.C. (Dekania Europe III)

--EUR105,389,741 class A1 notes 'BBsf'; Outlook 'Stable';

--EUR16,000,000 class A-2A notes 'Bsf'; Outlook 'Stable';

--EUR12,000,000 class A-2B notes 'Bsf'; Outlook 'Stable';

--EUR25,654,353 class B notes 'CCCsf';

--EUR20,655,580 class C notes 'CCsf';

--EUR14,134,512 class D notes 'Csf';

--EUR10,206,138 class E notes 'Csf';

--EUR5,175,749 class F notes 'Csf.

Fitch does not rate the subordinated notes for Dekania Europe I and II.

KEY RATING DRIVERS

Since last review the average credit quality of the performing collateral in Dekania Europe I slightly deteriorated to 'BB+/BB' from 'BBB-/BB+'. The average credit quality of the portfolio in Dekania Europe II and III remained relatively stable at 'BB+/BB' and 'BB/BB-', respectively.

There were no new deferrals or defaults in these transactions since last review. Two defaulted securities representing total notional of EUR 24.5 and 20.3 million in Dekania Europe II and III, respectively, have been removed from each portfolio with no recovery.

All three transactions experienced various levels of deleveraging from collateral redemptions since last review: 15% of the portfolio notional at last review in Dekania Europe I, 14% in Dekania Europe II and 12% in Dekania Europe III. The proceeds have been used to pay down the most senior notes in each deal. All performing issuers that reached their first call date in the past year called their securities on or prior to the call dates. The majority of the outstanding assets have an option to prepay after a non-call period, with remaining length in the next three years.

The paydown from excess spread varied across these three transactions. The deferred structuring fee expired in all three transactions in the past year. In Dekania Europe I, all of the overcollateralization (OC) tests are currently passing and as a result, there was no excess spread to pay down the notes. In Dekania Europe II and III, the class B and A OC tests, respectively, began to pass since last review, which resulted in marginally less excess spread available to pay down the most senior class. Dekania Europe II and III received EUR 2.6 million and EUR 1.7 million of excess spread respectively in the past year.

The high degree of concentration in all three transactions and significant exposure to the perpetual securities in Dekania Europe II and III contribute to the tail risk that may affect the subordinate notes. There are 20 performing issuers in Dekania Europe I, 21 in Dekania Europe II and 22 in Dekania Europe III.

Given the high degree of portfolio concentration in these transactions, the risk of adverse selection could negatively impact the ratings. This risk can be exacerbated if stronger quality issues are called, as was the trend over the last year, with the average credit quality of the called securities at

'A-'.

Perpetual securities comprise 8% of the performing portfolio in Dekania Europe I, 18% in Dekania Europe II, and 51% in Dekania Europe III. Because these securities do not have a stated legal maturity date, they may remain outstanding past the transactions legal maturity dates. In that case, Fitch standard assumption, as described in the 'Global Rating Criteria for CLOs and Corporate CDOs' is to assume that long-dated assets default and receive the assumed recovery value at the maturity of the CDO notes, which would be zero in the case of perpetual securities. Fitch considered a recent trend of perpetual securities that passed their initial call dates and noted that all of them were called. The collateral manager believes that most publicly traded perpetual securities are likely to call on or before their first call date; in addition the issuers of perpetual securities can call on subsequent payment dates. Following the initial call date, a coupon steps up and provides an initial incentive for a call.

Therefore, Fitch believes that a scenario where at least some publicly traded perpetual securities are called on their initial call date is possible and analysed these transactions under that scenario, in addition to running a scenario in which all securities remain outstanding until legal maturity and perpetual securities' remaining balances receive zero recovery. Fitch will monitor the occurrence of future calls and may adjust its scenarios in future rating reviews, if calls do not occur.

These transactions are also impacted by a potential sovereign risk, although currently at a minimal level, due to an exposure to issuers from countries with a country ceiling lower than notes' ratings. Fitch applied framework described in the report 'Criteria for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds' to account for this risk in the context of a multi-jurisdictional composition of the portfolios.

In evaluating the notes, Fitch applied the analytical framework described in the report 'Global Rating Criteria for CLOs and Corporate CDOs' using corporate PCM for projecting future default levels and performing a cash flow modelling analysis for the notes to measure the breakeven levels under the various default timing and interest rate stress scenarios.

The final ratings for class C note in Dekania Europe II and class A-2 and B notes in Dekania Europe III deviate from model outcome in some scenarios. In Dekania Europe II, class C note is passing at its current rating level in scenario which assumes publicly traded perpetual securities called. In Dekania Europe III, class A-2 and B notes are passing at their current rating levels in scenario which assumes no early redemptions and assigns 50% recovery value to perpetual securities at the CDO legal maturity.

Considering continuing deleveraging and an overall stable credit quality of the collateral in these three transactions, Fitch does not expect deterioration of the ratings in the near future and thus it maintains the Stable Outlook for classes rated 'Bsf' or higher.

RATING SENSITIVITIES

Significant collateral quality deterioration, new deferrals or defaults or maturity extension, especially in the absence of calls from perpetual issuers, could lead to a downgrade of the ratings for the notes.

DUE DILIGENCE USAGE

No third party due diligence was reviewed in relation to this rating action.

Additional information is available at www.fitchratings.com.

The information used to assess these ratings was sourced from trustee reports, collateral manager reporting Web sites and the public domain.

Applicable Criteria

Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158

Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds (pub. 19 Dec 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=838868

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748781

Criteria for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds (pub. 20 Feb 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862115

Global Rating Criteria for CLOs and Corporate CDOs (pub. 12 Nov 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873664

Global Structured Finance Rating Criteria (pub. 06 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=867952

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996122

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996122

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151207006117/en/

Fitch Ratings
Primary Analyst
Azadeh Sharif
Associate Director
+1-212-908-0874
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Committee Chairperson
Alina Pak
Senior Director
+1-312-368-3184
or
Media Relations:
Sandro Scenga, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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