TEXT-S&P takes rtg actions in Mercator CLO I deal

Mon Nov 5, 2012 7:30am EST

Nov 05 -

OVERVIEW

-- Since our last review, Mercator CLO I's class A-1 notes have continued to amortize, increasing the level of available credit enhancement across all classes of notes.

-- Despite a slight negative rating migration of performing assets, we observe an improved performance including higher weighted-average spread and recovery rates, and a shorter weighted-average life.

-- Following our analysis, we have raised our rating on the class A-1 and A-2 notes.

-- At the same time, we lowered our rating on the class B-2 deferrable notes and affirmed our rating on the A-3 deferrable and B-1 deferrable notes.

-- Mercator CLO I is a cash flow CLO transaction that securitizes loans to primarily speculative-grade corporate firms.

Standard & Poor's Ratings Services today raised its credit rating on Mercator CLO I PLC's class A-1 and A-2 notes. At the same time, we lowered our rating on the class B-2 deferrable notes and affirmed our ratings on the class A-3 deferrable and B-1 deferrable notes (see list below).

Since our last review on Sept. 15, 2011, and according to the latest available trustee report (dated Oct. 2, 2012), the class A-1 notes have continued to amortize to EUR187 million from EUR254 million as the transaction entered its second year of amortization, leading to increased credit enhancement levels for all classes, except for class B-2.

We have noticed that the weighted-average spread generated by the portfolio has increased to 3.66% from 3.13%, and that the weighted-average life has decreased to 3.8 years from 4.4 years. In addition, we note that the weighted-average recovery rates have slightly decreased.

We have observed a slight deterioration in the credit quality of the underlying assets in the portfolio, which comprise loans to primarily speculative-grade corporate obligors.

Our analysis indicates that the proportion of loans rated in the 'CCC' category has remained stable at about 8%, but defaulted assets now account for 2.8% compared with none last time.

As a result, we note that the class B-2 deferrable notes are now marginally failing their par value test. The test, which measures the level of overcollateralization available, caused excess interest to be diverted toward a further redemption of the class A-1 notes, in order to bring the test back to compliance. Note, however, that all other par value tests have improved due to the amortization of the class A-1 notes.

Following our cash flow analysis, we consider the level of credit enhancement available to the class A-1 and A-2 notes to be commensurate with higher ratings. We have therefore raised our rating on the class A-1 notes to 'AA+ (sf)' from 'AA (sf)' and to 'AA- (sf)' from 'A+ (sf)' on the class A-2 notes.

Our affirmations of the ratings on the class A-3 deferrable, and B-1 deferrable notes reflect our view that the credit support for these notes continues to be commensurate with our current ratings.

We have lowered our rating on the class B-2 deferrable notes to 'CCC+ (sf)' from 'B- (sf)'as they are constrained by the application of the largest obligor default test, a supplemental stress test that we introduced as part of our criteria update or by the largest industry default test, another of our supplemental stress tests (see "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2009).

Approximately 20% of the assets in the transaction's portfolio are non-euro-denominated, while the liabilities are all in euros. To mitigate the risk of foreign-exchange-related losses, the issuer has entered into currency options and interest rate derivative agreements with JPMorgan Chase Bank N.A. (A+/Negative/A-1) as counterparty. Under our 2012 counterparty criteria, our analysis of the derivative counterparty and its associated documentation indicates that, absent other mitigants, it cannot support ratings on the notes that are higher than 'AA- (sf)' (see "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012). To assess the potential impact on our ratings, we have assumed that the transaction does not benefit from the currency options and derivative agreements. We concluded that, in this scenario, the class A-1 notes would still be able to achieve a 'AA+ (sf)' rating, whereas the class A-2 notes can only achieve a 'AA- (sf)' rating in either scenario.

Mercator CLO I is a cash flow collateralized loan obligation (CLO) transaction that securitizes loans to primarily speculative-grade corporate firms.

RELATED CRITERIA AND RESEARCH

-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012

-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, April 8, 2011

-- Update to Global Methodologies and Assumptions for Corporate Cash Flow and Synthetic CDOs, Sept. 17, 2009

-- CDO Spotlight: General Cash Flow Analytics for CDO Securitization, Aug. 25, 2004

RATINGS LIST

Class Rating

To From

Mercator CLO I PLC

EUR413 Million Floating-Rate Notes

Ratings Raised

A-1 AA+ (sf) AA (sf)

A-2 AA- (sf) A+ (sf)

Rating Lowered

B-2 Def CCC+ (sf) B- (sf)

Rating Affirmed

A-3 def BBB+ (sf)

B-1 def BB+ (sf)

Def--Deferrable.