TEXT-S&P Affirms Katonah III Inc. Ratings
-- We affirmed our ratings on all classes from Katonah III Inc., a cash flow collateralized loan obligation (CLO) transaction.
-- Simultaneously, we removed the ratings on the class C-1, C-2, D-1 and D-2 notes from CreditWatch with positive implications.
-- The transaction is in its amortization phase and is scheduled to have an optional redemption on November 19, 2012.
NEW YORK (Standard & Poor's) Nov. 5, 2012--Standard & Poor's Ratings Services today affirmed its ratings on all classes of notes from Katonah III Inc., a collateralized loan obligation (CLO) transaction managed by Sankaty Advisors LLC and removed the C-1, C-2, D-1 and D-2 ratings (see list).
Standard & Poor's is aware that a notice of redemption was issued on Oct. 5, 2012, stating that a majority, as defined in the transaction's documents, of the preferred shareholders of the transaction have directed the trustee to redeem the notes in full on Nov. 19, 2012. We will withdraw the ratings if the principal balances of all note--and their deferred interest if any--are paid off in full on the redemption date.
The transaction is in its amortization phase and continues to pay down the class A notes, which are the senior-most notes. The class A note balance as of the October 2012 monthly report is $12.28 million, which is 3.83% of its original balance. Due to the senior note's lower balance, the overcollateralization (O/C) ratios increased for all classes.
However, the senior note of such CLOs is also the note that typically carries the highest rating and hence pays the lowest interest to the noteholders. As the CLOs amortize and the senior note balance decreases, the weighted average cost of debt to the CLOs increases. This, in turn, affects the interest coverage (I/C) ratios of the transactions.
The above is evident for Katonah III, the I/C ratios of which have started declining over the year and are currently failing for the class B, C, and D notes as of the October 2012 monthly trustee report. The class B I/C test started to fail since September 2012; the class C I/C ratio started to fail since June 2012, which resulted in the class D notes deferring their interest in the August 2012 payment period.
Today's affirmations reflect the availability of credit support at the current rating levels. Standard & Poor's will continue to review whether, in its view, the ratings assigned to the notes remain consistent with the credit enhancement available to support them and take rating actions as we deem necessary.
STANDARD & POOR'S 17G-7 DISCLOSURE REPORT
SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Rule applies to in-scope securities initially rated (including preliminary ratings) on or after Sept. 26, 2011.
If applicable, the Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available at
RELATED CRITERIA AND RESEARCH
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009
-- Application Of Supplemental Tests For Rating Global Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009
-- General Criteria: Understanding Standard & Poor's Rating Definitions, June 3, 2009
-- CDO Spotlight: General Cash Flow Analytics For CDO Securitizations, Aug. 25, 2004
RATING AND CREDITWATCH ACTIONS Katonah III Inc.
Class To From
C-1 A+ (sf) A+ (sf)/Watch Pos
C-2 A+ (sf) A+ (sf)/Watch Pos
D-1 BBB+ (sf) BBB+ (sf)/Watch Pos
D-2 BBB+ (sf) BBB+ (sf)/Watch Pos
Katonah III Inc.
A AAA (sf)
B-1 AAA (sf)
B-2 AAA (sf)