TEXT-S&P takes rtg actions on Highlander Euro CDO III's notes

Fri Nov 9, 2012 9:10am EST

Nov 09 -

OVERVIEW

-- We have reviewed Highlander Euro CDO III's performance by applying our relevant criteria and conducting our credit and cash flow analysis.

-- Based on our analysis, we have affirmed our ratings on the class A, B, C, and E notes and lowered our rating on the class D notes.

-- Highlander Euro CDO III is a cash flow CLO transaction that securitizes loans to primarily speculative-grade corporate firms, with collateral managed by CELF Advisors LLP.

Standard & Poor's Ratings Services today took various credit rating actions on all rated classes of notes in Highlander Euro CDO III.

Specifically, we have:

-- Affirmed our 'AA+ (sf)' rating on the class A notes;

-- Affirmed our 'A+ (sf)' rating on the class B notes;

-- Affirmed our 'BBB+ (sf)' rating on the class C notes;

-- Lowered to 'B+ (sf)' from 'BB+ (sf)' our rating on the class D notes; and

-- Affirmed our 'CCC+ (sf)' rating on the class E notes.

Today's rating actions follow our review of the transaction's performance by applying our credit and cash flow analysis, together with our relevant criteria for transactions of this type.

Following our analysis, we have observed that the overall credit quality of the portfolio has slightly improved. Since our previous review, the proportion of assets rated in the 'CCC' category (rated 'CCC+', 'CCC', or 'CCC-') has decreased to 2.60% from 6.78%, and the level of defaulted assets (assets from obligors rated 'CC', 'SD' [selective default], or 'D') has increased to 1.57% from 0.00%. Credit enhancement has slightly decreased for all classes of notes, since our last review. The transaction now benefits from a shorter weighted-average life and a materially higher weighted-average spread.

We have subjected the transaction's capital structure to a cash flow analysis to determine the break-even default rates for each rated class at each rating level. We have incorporated a series of cash flow stress scenarios using various default patterns and levels for each liability rating category, in conjunction with different interest stress scenarios.

In our opinion, the credit enhancement available to the class A notes is consistent with the rating that we have previously assigned. We have therefore affirmed our 'AA+ (sf)' rating on the class A notes.

Our ratings on the class B, C, D, and E notes are constrained by the application of the largest obligor test, a supplemental stress test that we introduced in our 2009 cash flow collateralized debt obligation (CDO) criteria (see "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2009). This test addresses event and model risk that might be present in the transaction. Based on our modified approach with regard to individual obligors belonging to the same group, we now perceive the portfolio as more concentrated, compared to our last review in October 2011 (see "Ratings Raised On Class A To E Notes In Highlander Euro CDO III Due To Improved Performance; Class Q Rating Withdrawn," published on Oct. 17, 2011). Although the break-even default rates generated by our cash flow model indicated higher ratings, the largest obligor test effectively capped the ratings on the class B notes at 'A+ (sf)', on the class C notes at 'BBB+ (sf)', on the class D notes at 'B+ (sf)', and on the class E notes at 'CCC+ (sf)'. We have therefore affirmed our ratings on the class B, C, and E notes and lowered our rating on the class D notes to 'B+ (sf)' from 'BB+ (sf)'.

The Bank of New York Mellon (AA-/Negative/A-1+) acts as an account bank and custodian. In our view, the counterparty is appropriately rated to support the ratings on these notes (see "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012).

Highlander Euro CDO III entered into a number of derivative agreements to mitigate currency and interest rate risks in the transaction. We consider the documentation for these derivatives as not fully compliant with our 2012 counterparty criteria. Therefore, in our cash flow analysis for the class A notes, we have assumed no benefit from any derivative support. Based on this analysis, we have affirmed our rating on the class A notes at 'AA+ (sf)'.

Highlander Euro CDO III is a cash flow collateralized loan obligation (CLO) transaction that closed in April 2007. The portfolio is managed by CELF Advisors LLP.

RELATED CRITERIA AND RESEARCH

-- S&P Announcement: CDO Evaluator Version 6.0.1 Released, Aug. 7, 2012

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

-- Credit Rating Model: CDO Evaluator 6.0, March 19, 2012

-- European Structured Finance Scenario And Sensitivity Analysis: The Effects of The Top Five Macroeconomic Factors, March 14, 2012

-- Global CDOs Of Pooled Structured Finance Assets: Methodology And Assumptions, Feb 21, 2012

-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects of The Top Five Macroeconomic Factors, Nov. 14, 2011

-- Ratings Raised On Class A To E Notes In Highlander Euro CDO III Due To Improved Performance; Class Q Rating Withdrawn, Oct 17, 2011

-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011

-- Credit Rating Model: S&P Cash Flow Evaluator, Aug. 17, 2010

-- Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009

-- Understanding Standard & Poor's Rating Definitions, June 3, 2009

-- General Cash Flow Analytics for CDO Securitizations, Aug. 25, 2004

RATINGS LIST

Highlander Euro CDO III B.V.

EUR800 Million Floating-Rate And Deferrable Floating-Rate Notes

Rating

Class To From

Ratings Affirmed

A AA+ (sf)

B A+ (sf)

C BBB+ (sf)

E CCC+ (sf)

Rating Lowered

D B+ (sf) BB+ (sf)

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