Fitch Ratings has upgraded 14, downgraded 1, and affirmed 25 classes of notes from 11 structured finance collateralized debt obligations (SF CDOs) with exposure to various structured finance assets.
KEY RATING DRIVERS
One class, affirmed at 'Dsf', is a non-deferrable class which continues to experience interest payment shortfalls. The class II notes of Northlake CDO I, Ltd./Corp were downgraded from 'Csf' to 'Dsf' following an acceleration of the deal in October 2014. The class II notes are a non-deferrable class and are experiencing interest payment shortfalls.
Twenty-one classes rated 'Csf' have credit enhancement (CE) levels that are exceeded by the expected losses (EL) from the distressed collateral (rated 'CCsf' and lower) of each portfolio. For these classes, the probability of default was evaluated without factoring potential losses from the performing assets. In the absence of mitigating factors, default for these notes at or prior to maturity appears inevitable.
One class has been upgraded to 'CCsf' from 'Csf' as the class has a CE level that is greater than EL. Default still remains probable as this class is not expected to withstand losses projected at the 'CCCsf' rating stress under Fitch's Structured Finance Portfolio Credit Model (SF PCM) analysis.
The upgrades are attributed to significant deleveraging of each transaction's capital structure which has resulted in increased CE available to the notes. According to the SF PCM and EL analysis, these tranches are now able to withstand losses at levels above what was contemplated at Fitch's previous review.
In addition, although the CE available to the class A-1 and A-1L notes of Diversified Asset Securitization Holdings II, L.P./Corp. is indicative of a 'AAAsf' rating, Fitch believes that decreasing interest collections and reliance on principal proceeds to meet interest obligations introduces a risk of interest shortfall that is commensurate with a 'BBBsf' rating.
The CE available to the class A-2 notes of Solstice ABS CDO III LTD. is indicative of a 'BBsf' rating. However, Fitch believes that the increasing principal leakage through the interest waterfall will erode the CE and create interest shortfall risk for the notes. Given these risks, Fitch believes the appropriate rating for the notes is 'Bsf'.
RATING SENSITIVITIES
Negative migration, defaults beyond those projected, and lower than expected recoveries could lead to downgrades for classes analyzed under the SF PCM. Classes already rated 'Csf' have limited sensitivity to further negative migration given their highly distressed rating levels. However, there is potential for non-deferrable classes to be downgraded to 'Dsf' should they experience any interest payment shortfalls.
This review was conducted under the framework described in the reports 'Global Structured Finance Rating Criteria' and 'Global Rating Criteria for Structured Finance CDOs'. None of the transactions have been analyzed under a cash flow model framework, as the effect of structural features and excess spread available to amortize the notes were determined to be minimal. The individual rating actions are detailed in the report 'Fitch Takes Various Rating Actions on 11 SF CDOs from 2000-2005 Vintages', released and available at 'www.fitchratings.com' by performing a title search or by using the above link.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Structured Finance Rating Criteria' (Aug. 4, 2014);
--'Global Rating Criteria for Structured Finance CDOs' (July 16, 2014);
--'Counterparty Criteria for Structured Finance and Covered Bonds' (May 14, 2014).
Applicable Criteria and Related Research: Fitch Takes Various Rating Actions on 11 SF CDOs from 2000-2005 Vintages
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=856108
Global Rating Criteria for Structured Finance CDOs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751136
Global Structured Finance Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754389
Counterparty Criteria for Structured Finance and Covered Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=744158
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=969835
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