Fitch Takes Various Actions on 11 Trust Preferred CDOs

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has taken the following rating actions on tranches from 11 collateralized debt obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks and insurance companies:

--Affirmed 66 tranches;

--Upgraded 13 tranches;

--Revised various Rating Outlooks.

KEY RATING DRIVERS

Credit Quality of Collateral: For most of the transactions, the credit quality of the collateral portfolios, as measured by a combination of Fitch's bank scores and ratings, remained stable or improved. As reported in the rating action report, average credit quality has improved since last review in eight CDOs. Three transactions experienced new deferrals.

Collateral Redemptions: Nine 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.

Excess Spread and CDO Structure: Excess spread continued to contribute to deleveraging of all CDOs due to the failing coverage tests. In five transactions the excess spread will be paying down the capitalized interest on mezzanine notes. In Preferred Term Securities XVII and XVIII the excess spread from the failure of second priority overcollateralization (OC) test is currently used to pay down the class A and B notes on a pro rata basis, that results in less benefit to the most senior notes. Fitch estimates the additional CE from excess spread as described in 'Surveillance Criteria for TruPS CDOs,' dated April 21, 2015. The uplift to the passing ratings from the excess spread ranged in magnitude from none to three notches across the CDOs included in this review. Given that the base line of excess spread receives a bigger haircut in higher rating stresses, notes rated at high investment-grade levels received less credit from projected future excess spread. Therefore, the impact is in general more significant for notes rated below investment grade.

Resolution and Recovery of Defaults and Deferrals: The number of cures continued to trend upward, as Fitch reports in its quarterly Fitch Bank TruPS CDO index. Fitch assesses the likelihood of a cure for a current deferral based on the score history of a deferring issuer since deferral, as described in its criteria. Deferring issuers defined as 'strong' are assigned a higher likelihood of curing than 'weak' deferrals.

As a result of cures and transactions deleveraging, in five CDOs (Alesco Preferred Funding IX and XVI, Preferred Term Securities XXI and XXII and Trapeza CDO XIII), the mezzanine or senior coverage OC tests began to pass which led to the resumption of interest payments to mezzanine classes previously cut off from distributions.

Fitch has observed seven issuers across five different transactions to re-defer, after they had previously paid their cumulative deferred interest. These redeferrals represent an average of 1.7% across the five CDOs' portfolios. The re-deferring issuers are considered weak as defined in the 'Surveillance Criteria for TruPS CDOs'.

The key rating drivers highlighted above are incorporated in Fitch's TruPS model. The ratings on some notes passing at a high investment grade level were capped below their passing rating level, as indicated in the rating action report under 'Rating Rationale', due to portfolio concentration and/or expected long-term horizon for the notes' paydown that can result in rating volatility that Fitch views as inconsistent with the high investment-grade rating.

Ratings on some junior classes of notes were capped below the passing levels to reflect their low performing CE in comparison to the averages for the relevant rating levels.

RATING SENSITIVITIES

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.

To account for uncertainty around the pace of redemptions and cures and, consequently, magnitude of future excess spread, Fitch's rating analysis capped the levels of excess spread to the amounts projected only over the near term.

For non-deferrable notes, Fitch performs analysis of notes' interest sensitivity to additional defaults and deferrals, as described in the criteria. 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.

DUE DILIGENCE USAGE

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

Additional information is available at www.fitchratings.com.

Fitch Takes Various Actions on 11 Trust Preferred CDOs

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868453

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 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

Global Rating Criteria for Corporate CDOs (pub. 25 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753057

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

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

Surveillance Criteria for Trust Preferred CDOs (pub. 21 Apr 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864352

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987693

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987693

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/20150709006276/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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