Fitch Affirms All Classes of Three Dekania Europe CDOs
NEW YORK, December 11 Fitch Ratings has affirmed the ratings on all classes of notes from three European collateralized debt obligations as follows:
Dekania Europe CDO I P.L.C.
--EUR 103,725,013 class A1 notes at 'AAsf'; Outlook Stable;
--EUR 11,500,000 class A2 notes at 'Asf'; Outlook Stable;
--EUR 13,000,000 class A3 notes at 'Asf'; Outlook Stable;
--EUR 35,000,000 class B1 notes at 'BBsf'; Outlook Stable;
--EUR 15,000,000 class B2 notes at 'BBsf'; Outlook Stable;
--EUR 29,500,000 class C notes at 'B-sf'; Outlook Stable;
--EUR 15,461,821 class D notes at 'CCCsf'.
Dekania Europe CDO II P.L.C.
--EUR 123,634,547 class A1 notes at 'Asf'; Outlook Stable;
--EUR 25,000,000 class A2-A notes at 'BBBsf'; Outlook Stable;
--EUR 5,000,000 class A2-B notes at 'BBBsf'; Outlook Stable;
--EUR 26,515,950 class B notes at 'BBsf'; Outlook Stable;
--EUR 29,496,733 class C notes at 'Bsf'; Outlook Stable;
--EUR 14,253,906 class D1 notes at 'CCsf';
--EUR 2,636,813 class D2 notes at 'CCsf';
--EUR 15,817,000 class E notes at 'Csf'.
Dekania Europe CDO III P.L.C.
--EUR 134,600,735 class A1 notes at 'BBsf'; Outlook Stable;
--EUR 16,000,000 class A-2A notes at 'Bsf'; Outlook Stable;
--EUR 12,000,000 class A-2B notes at 'Bsf'; Outlook Stable;
--EUR 25,603,806 class B notes at 'CCCsf';
--EUR 20,388,208 class C notes at 'CCsf';
--EUR 13,860,530 class D notes at 'Csf';
--EUR 9,809,409 class E notes at 'Csf';
--EUR 4,920,152 class F notes at 'Csf.
Fitch does not rate the subordinated notes for Dekania Europe I and II.
KEY RATING DRIVERS
Across the three CDOs, the average credit quality of collateral has remained relatively stable since last review. The average credit quality of the performing portfolio in Dekania Europe I to III is currently at 'BBB-/BB+', 'BB+/BB' and 'BB+/BB', respectively.
There were no new deferrals or defaults in any of these transactions. A deferring asset with notional value of EUR 12 million in Dekania Europe II and III has resumed interest payments including the deferred interests in December 2013. Additionally, a defaulted security with notional value of EUR 12 million has been removed from the portfolio of Dekania II and III with zero recovery.
All three transactions experienced various levels of collateral redemptions since last review: 6.2% in Dekania Europe I, 4.8% in Dekania Europe II and 2.6% in Dekania Europe III. The proceeds from the collateral redemptions have been used to pay down the most senior notes in Dekania Europe II and III. In the case of Dekania Europe I, $15.9 million in the principal collection account will be used to pay down class A1 notes on the next payment date.
The contributions from the excess spread varied across these three transactions. In Dekania Europe I, all of the overcollateralization tests are currently passing and as a result no excess spread is used to delever the transaction. In Dekania Europe II, the class A and B OC tests have started to pass since last review and therefore less excess spread is expected to be available to the senior note. In Dekania Europe III, all of the OC tests continue to fail. Since last review, EUR 3.7 million and EUR 1.9 million of excess spread was used to pay down senior notes in Dekania Europe II and III, respectively
The high degree of concentration in these transactions and significant exposure to the perpetual securities in Dekania Europe II and III contribute to the tail risk that will affect the subordinate notes. There are 24 performing issuers in Dekania Europe I and 26 performing issuers in Dekania Europe II and III.
The perpetual securities comprise 14% of the performing portfolio in Dekania Europe I, 18% in Dekania Europe II, and 44% in Dekania Europe III. Fitch's recovery assumption for perpetual securities in default is zero, significantly lower than that for other subordinated debt. In addition, if not called prior to the CDO legal maturity date, performing perpetual securities will have to be liquidated at potentially a significant discount to their par values.
Given the high degree of portfolio concentration in these transactions, the risk of adverse selection could negatively impact the ratings.
The majority of the underlying assets in these portfolios have an option to prepay after a non-call period ranging from five to 10 years. The maturity profile of the portfolios affects default rates projected by Fitch's Portfolio Credit Model and availability and timing of cash flows.
Given the high degree of uncertainty as to the likelihood of calls, Fitch considered collateral manager's expectations for the likelihood of calls as the sensitivity scenario. This resulted in a significantly shorter weighted average life of the portfolios across all three transactions and consequently lower default projections. However, this was offset by less excess spread available over the life of the transactions. Consequently, passing ratings under the sensitivity scenario were no more than a category higher than in the base case scenario for senior classes and lower or the same for subordinated classes across all three transactions.
In evaluating the notes, Fitch focused on the analytical framework described in the report 'Global Rating Criteria for Corporate CDOs' using the PCM for projecting future default levels for the underlying portfolio. In this review, Fitch also conducted cash flow modeling analysis for the notes to measure the breakeven levels under the various default timing and interest rate stress scenarios. In some scenarios, the breakevens indicate higher passing ratings than the current levels. However, Fitch considered additional risks attributed to high concentration and exposure to perpetual securities to cap the ratings. The Stable Outlook reflects the available cushions to the current ratings in the breakeven levels from the cash flow model
Primary Surveillance Analyst
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
Alina Pak, CFA
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: firstname.lastname@example.org.
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Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' ;
--'Global Rating Criteria for Corporate CDOs' ;
--'Counterparty Criteria for Structured Finance and Covered Bonds' ;
--'Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds' .
Applicable Criteria and Related Research:
Criteria for Interest Rate Stresses in Structured Finance Transactions and Covered Bonds
Counterparty Criteria for Structured Finance and Covered Bonds
Global Rating Criteria for Corporate CDOs
Global Structured Finance Rating Criteria