Fitch Takes Various Actions on 11 Trust Preferred CDOs

Proquest LLC

The following is from Fitch Ratings on July 17:

Fitch Ratings has upgraded 12 tranches and affirmed 67 tranches of total 79 tranches from 11 Collateralized Debt Obligations (CDOs) backed primarily by Trust Preferred (TruPS) securities issued by banks and insurance companies:

The rating action report, titled 'Fitch Takes Various Rating Actions on 11 TruPS CDOs', dated July 17, details the individual rating actions and portfolio characteristics for each rated CDO. It can be found on Fitch's website at fitchratings.com' by performing a title search or by using the link below. For further information and transaction research, please refer to 'fitchratings.com'.

The key rating factors for today's rating actions are highlighted below.

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 detailed in the rating action report.

Collateral Redemptions: Most CDOs received meaningful level of redemptions that paid down the senior-most notes and increased credit enhancement (CE) levels for all rated notes. The magnitude of redemptions for each CDO is reported in the rating action report. Potential upgrades were weighed against the risk of adverse selection in the remaining portfolios and the likelihood of the remaining note balance to be outstanding for an extended period of time.

Excess Spread and CDO Structure: Excess spread continued to contribute to deleveraging of all CDOs. However the level of benefit for the most senior notes from excess spread varied across these transactions. In two transactions, Alesco Preferred Funding XVI and Preferred Term Securities XXI, the excess spread is currently paying down the capitalized interest on class B notes. In four transactions the excess spread from the failure of second priority OC test is used to pay down balance of the class A and B notes on the pro rata basis that resulted in less benefit to the most senior notes. Nevertheless, across the 11 deals, this additional credit enhancement provided an uplift of varying magnitude to the passing ratings, from none to a maximum of four notches. Given that the base line of excess spread received 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 was in general more significant for notes rated below investment grade. Fitch estimates future levels of excess spread as described in the criteria 'Surveillance Criteria for TruPS CDOs,' dated April 21.

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. All transactions experienced new cures. 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 the criteria. Deferring issuers defined as 'strong' are assigned a higher likelihood of curing than 'weak' deferrals.

The key rating drivers highlighted above are incorporated in Fitch's TruPS model. Notes passing at a high investment grade level may have been capped below their passing rating if the notes are expected to remain outstanding for a sufficiently long time horizon and be exposed to a potential deterioration more severe than the one reflected in the sensitivity scenario. This could result in rating volatility that Fitch views as inconsistent with the high investment grade rating.

In certain cases, ratings on mezzanine notes that resumed receiving their current interest but are not expected to pay down their capitalized interest in the near term were also capped below the notes' passing levels.

Fitch Rating action report details notes where a rating cap was applied.

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 future.

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.

Additional information is available at '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 Research:

--'Surveillance Criteria for Trust Preferred CDOs' (April 21,);

--'Global Rating Criteria for Corporate CDOs' (August 8, 2013);

--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14,);

--'Criteria for Rating Caps and Limitations in Global Structured Finance Transactions' (May 28,).

Applicable Criteria and Related Research: Fitch Takes Various Actions on 11 Trust Preferred CDOs

http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=752774

Counterparty Criteria for Structured Finance and Covered Bonds

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

Criteria for Rating Caps and Limitations in Global Structured Finance Transactions