TEXT-S&P takes rtg actions in CDO deal European enhanced loan fund

Wed Nov 14, 2012 4:50am EST

In our review, we considered recent transaction developments. We included data from the September 2012 trustee report, our ratings database, and our cash flow analysis. We applied our 2012 counterparty criteria and our 2009 cash flow collateralized debt obligation (CDO) criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012 and "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2009).

CREDIT ANALYSIS

In terms of the portfolio's credit quality, the level of assets that we consider to be rated in the 'CCC' category ('CCC+', 'CCC', or 'CCC-') has decreased to 2.09% from 3.57%, as a percentage of performing assets excluding cash. In addition, the weighted-average life of the assets in the portfolio has decreased to 3.91 years from 4.38 years.

These revised parameters have led to a lower scenario default rate (SDR) for all classes of notes compared with our previous review, as provided by our CDO Evaluator (Version 6.0.1) model. Through a "Monte Carlo" methodology, the CDOEvaluator evaluates a portfolio's credit quality. It considers the issuer credit rating, size, domicile, and maturity date of each asset and the correlation between each pair of assets. It presents the portfolio's credit quality in terms of a probability distribution for potential default rates. From this distribution, it derives a set of SDRs that identify, for each rating level, the minimum level of portfolio defaults a class of notes should be able to withstand without defaulting.

We also note that defaulted assets (i.e., debt obligations of obligors rated 'CC', 'SD' [selective default], or 'D'), as a percentage of all assets excluding cash now total 4.96% compared with none observed in our previous review. This has had a negative effect on the transaction.

CASH FLOW ANALYSIS

Following our credit analysis, we subjected the transaction's capital structure to a cash flow analysis to determine the break-even default rate (BDR) for each rated class of notes at each rating level. The tranche BDR and the SDR, provided by our CDO Evaluator, are the key parameters in our methodology for the rating and surveillance of CDO transactions.

In our analysis, we used the portfolio balance that we considered to be performing (EUR309.9 million), the reported weighted-average spread (3.194% for euro-denominated assets and 3.950% for sterling-denominated assets), and the weighted-average recovery rates as per our 2009 cash flow CDO criteria. We incorporated various cash flow stress scenarios using our standard default patterns, levels, and timings for each rating category assumed for each class of notes, in conjunction with different interest rate and currency stress scenarios.

COUNTERPARTY RISK

The issuer has entered into options agreements with JP Morgan Chase Bank N.A. (A+/Negative/A-1).

In our opinion, the downgrade provisions of the counterparty agreements do not fully comply with our 2012 counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012).

ADDITIONAL SCENARIOS TESTED FOR COUNTERPARTY RISK

Therefore, in our cash flow analysis, we assume that there are no options in the transaction for all scenarios at a rating higher than the long-term rating on the counterparty plus one notch, 'AA- (sf)'. This affected class A-1, A-2, A-3B, B-1, and B-2 notes, which results in a cap at 'AA (sf)' for the class A-1, A-2, and A-3B notes, and at 'AA- (sf)' for the class B-1 and B-2 notes.

For the class A-1, A-2, A-3A, A-3B, B-1, and B-2 notes, our credit and cash flow analysis, with additional scenarios under which we assume there are no options, indicate that the level of credit enhancement available to the notes is commensurate with the current ratings. We have therefore affirmed our ratings on those classes of notes.

RATINGS CONSTRAINED BY SUPPLEMENTAL STRESS TESTS

The ratings on the class D-1, D-2, D-3, and D-4 notes, and the class E-1, E-2, and E-3 notes are constrained by the application of the largest obligor default test, a supplemental stress test that we introduced in our 2009 criteria update for CDOs (see "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2009). We have therefore affirmed our ratings on the class D-1, D-2, D-3, and D-4 notes as the ratings on these notes are constrained at their current levels by the application of the largest obligor default test.

We have lowered our ratings to 'B+ (sf)' from 'BB (sf)' on the class E-1, E-2, and E-3 notes; the ratings on these notes are constrained at those lowered levels by the application of the largest obligor default test.

RATINGS NOT CONSTRAINED BY SUPPLEMENTAL STRESS TESTS

The rating on the class C notes is not constrained by the application of the largest obligor default test. Our credit and cash flow analysis indicate that the level of credit enhancement available to the class C notes is commensurate with a higher rating of 'A-(sf)'. We have therefore raised our rating on the class C notes to 'A- (sf)' from 'BBB+ (sf)'.

European Enhanced Loan Fund is a cash flow collateralized debt obligation (CDO) transaction, backed primarily by leveraged loans to speculative-grade corporate firms. The transaction closed on May 18, 2006, and is managed PIMCO Europe Ltd. The transaction ended its reinvestment period on May 18, 2012.

RELATED CRITERIA AND RESEARCH

-- June 2012 European CLO Performance Index Report: Overall Performance Improves As Defaulted Assets Decrease, Oct. 24, 2012

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

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

-- Ratings Raised In European Enhanced Loan Fund Due To Improved Performance; Rating On Class A-3A Notes Affirmed, Nov. 11, 2011

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

-- 152 Ratings Lowered In 26 European CLO Transactions; $12.52 Billion Of Issuance Affected (Dec. 17, 2009 Review), Dec. 17, 2009

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

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

RATINGS LIST

European Enhanced Loan Fund S.A.

EUR413 Million Secured Floating- And Fixed-Rate Notes

Class Rating

To From

RATING RAISED

C A- (sf) BBB+ (sf)

RATINGS LOWERED

E-1 B+ (sf) BB (sf)

E-2 B+ (sf) BB (sf)

E-3 B+ (sf) BB (sf)

RATINGS AFFIRMED

A-1 AA (sf)

A-2 AA (sf)

A-3A AA+ (sf)

A-3B AA (sf)

B-1 AA- (sf)

B-2 AA- (sf)

D-1 BB+ (sf)

D-2 BB+ (sf)

D-3 BB+ (sf)

D-4 BB+ (sf)

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