Fitch Ratings has affirmed 61 tranches, upgraded 27 tranches, and downgraded two tranches from 20 Collateralized Debt Obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks. In addition, Fitch has assigned various Rating Outlooks.
The rating action report, titled 'Fitch Takes Various Rating Actions on 20 TruPS CDOs', dated July 25, 2013, details the individual rating actions and portfolio characteristics for each rated CDO. It can be found on Fitch's website at www.fitchratings.com' by performing a title search or by using the link below. For further information and transaction research, please refer to 'www.fitchratings.com'.
The key rating factors for today's rating actions are highlighted below.
KEY RATING DRIVERS:
Credit Quality of Collateral: For the most 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, in 18 CDOs average credit quality has improved since last review. Only eight transactions experienced new deferrals and defaults, with most of new defaults deferring at last review.
Collateral Redemptions: Since last rating action, Fitch has continued to observe a meaningful level of redemptions used to pay down the senior-most notes in TruPS CDOs contributing to increased credit enhancement (CE) levels for rated liabilities. The magnitude of redemptions for each CDO is reported in the rating action report. Redemptions averaged three issuers per deal or 8.2% of collateral balances since the last rating action.
The impact of redemptions varies across TruPS CDOs. In more seasoned transactions with a relatively small senior note balance, prepayments provided a significant deleveraging effect. However, potential upgrades were weighed against the risk of adverse selection in the remaining portfolios and the likelihood of the remaining balance to be outstanding for an extended period of time.
Excess Spread and CDO Structure: Excess spread continued to contribute to deleveraging most of the CDOs. Given the steady trends of declining new defaults and deferrals and increasing numbers of cures, Fitch updated its criteria to estimate and credit the future levels of excess spread over a five-year horizon in its rating analysis. The details of the analytical framework are explained in the criteria 'Surveillance Criteria for TruPS CDOs,' dated July 10, 2013.
Future levels of excess spread will be affected by the state of the coverage tests. As reported in the rating action report, six of the 20 CDOs are currently failing the most senior overcollateralization test and seven are currently failing the second-tier overcollateralization test. Three transactions are passing their coverage test but are currently capturing excess spread through the Optimal Principal Distribution Amount (OPDA) mechanism.
Fitch estimated time to cure for the most senior overcollateralization coverage test using its base prepayment assumptions, as described in Fitch criteria. This estimate assumes no new defaults, deferrals or cures and a flat interest rate environment.
Across the 20 deals, this additional credit enhancement did not provide a meaningful uplift to the passing ratings given the haircuts applied to the base line of excess spread levels for various rating stresses. In addition, for some transactions whose senior coverage tests recently came back in compliance, excess spread is directed to re-pay accumulated deferred interest to the second-priority classes previously cut off from receiving interest by the failing coverage tests. This diminishes excess spread available in the near-term future to deleverage transactions.
Resolution and Recovery of Defaults and Deferrals: The number of cures continues 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. Currently deferring issuers defined as 'strong' are assigned a higher likelihood of curing than 'weak' deferrals.
Changes in the rating drivers described above could lead to rating changes in the TruPS CDO notes.
To account for uncertainty around the pace of early redemptions, 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 future.
In addition, to address potential risks of adverse selection and increased portfolio concentration after likely redemptions by the issuers with asset size of $15 billion or more, Fitch applied a sensitivity scenario, as described in the criteria.
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 and Related Criteria:
--'Global Surveillance Criteria for Trust Preferred CDOs' (July 10, 2013);
--'Global Rating Criteria for Corporate CDOs' (August 08, 2012);
--'Counterparty Criteria for Structured Finance and Covered Bonds '(May 13, 2013);
--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (June 12, 2013).
Applicable Criteria and Related Research: Fitch Takes Various Actions on 20 Trust Preferred CDOs
Counterparty Criteria for Structured Finance and Covered Bonds
Global Rating Criteria for Corporate CDOs
Global Surveillance Criteria for Trust Preferred CDOs -- Effective July 11, 2012 to July 10, 2013
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