TEXT-S&P raises rating on class A notes in Fugu CLO

Mon Nov 12, 2012 7:07am EST

Nov 12 -

OVERVIEW

-- We have reviewed Fugu CLO's performance by applying our relevant criteria and conducting our credit and cash flow analysis.

-- Following our review, we have raised our rating on the class A notes to 'AA+ (sf)' from 'AA- (sf)'.

-- Fugu CLO is a cash flow CLO transaction that securitizes loans to primarily speculative-grade corporate firms, with collateral managed by Babson Capital Europe Ltd.

Standard & Poor's Ratings Services today raised to 'AA+ (sf)' from 'AA- (sf)' its credit rating on Fugu CLO B.V.'s class A notes.

Today's upgrade follows 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 (see "Related Criteria And Research").

Our analysis shows that the transaction's credit enhancement has materially improved since our last review (see "Rating Raised On Class A Notes in Fugu CLO Following Review," published on Oct. 6, 2011). The transaction now has a shorter weighted-average life and a higher weighted-average spread.

However, our analysis also indicates that the overall credit quality of the portfolio has decreased since our previous review. The proportion of assets rated in the 'CCC' category (rated 'CCC+', 'CCC', or 'CCC-') has increased to 2.22% of the remaining pool, from 1.50%, and the level of defaulted assets (assets from obligors rated 'CC', 'SD' [selective default], or 'D') has increased to 4.86% of the remaining pool, from 0.00%.

We have subjected the transaction's capital structure to a cash flow analysis to determine the break-even default rate for the class A notes. Our analysis incorporates a series of cash flow stress scenarios using various default patterns and levels, in conjunction with different interest stress scenarios.

We note that a significant proportion of the portfolio consists of assets denominated in currencies other than the currency of the transaction's liabilities. Bank of America N.A. (A/Negative/A-1) acts as the only swap counterparty in the deal, and it does not fully comply with our 2012 counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012). We have therefore subjected the transaction to additional foreign exchange stresses. Following this analysis, we have raised to 'AA+ (sf) from 'AA- (sf)' our rating on Fugu CLO B.V.'s class A notes.

Fugu CLO is a cash flow collateralized loan obligation (CLO) transaction that closed in December 2008. The transaction securitizes loans to primarily speculative-grade corporate firms. The portfolio is managed by Babson Capital Europe Ltd.

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 Structured Finance Scenario And Sensitivity Analysis: The Effects of The Top Five Macroeconomic Factors, Nov. 4, 2011

-- Rating Raised On Class A Notes In Fugu CLO Following Review, Oct. 6, 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

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