TEXT-S&P affirms rtgs on Channel Capital and its subordinated debt

Fri Nov 16, 2012 5:48am EST

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OVERVIEW

-- We have reviewed the subordination available to Channel Capital and its subordinated and junior subordinated debt issues as per Channel Capital's Oct. 31, 2012 capital model report.

-- We have determined that the subordinated and junior subordinated debt issues can pass the capital model tests at stress levels commensurate with our respective ratings on these issues.

-- We have therefore affirmed our 'AA-' long-term and 'A-1+' short-term issuer credit ratings on Channel Capital and our issue ratings on Channel Capital's subordinated and junior subordinated debt. Our outlook on Channel Capital is stable.

-- Channel Capital is a credit-derivative product company that primarily sells credit protection through CDS transactions referencing highly rated portfolio of tranches of corporate, sovereign, and supranational credit risk.

Standard & Poor's Ratings Services today affirmed its 'AA-' long-term and 'A-1+' short-term issuer credit ratings (ICRs) on Channel Capital PLC and its issue ratings on Channel Capital's subordinated and junior subordinated debt. Our outlook on Channel Capital is stable (see list below).

Today's rating actions follow our review of the subordination available to Channel Capital and its subordinated and junior subordinated debt issues using data from Channel Capital's capital model report of Oct. 31, 2012. The affirmations reflect our view that there is sufficient subordination available to support the ICRs on Channel Capital and the issue ratings on the subordinated and junior subordinated debt. According to Channel Capital's October 2012 report, the ICRs and the issue ratings can pass the capital model tests at stress levels that are commensurate with the respective ratings. We placed the capital model under a series of additional stresses, including:

-- A two-notch downgrade of all of the obligors;

-- A two-notch downgrade of all of the swap counterparties;

-- A default of all obligors in the largest industry group--financial intermediaries--and our assumption of 17% recovery; and

-- A 20% reduction of our mean recovery assumptions.

Channel Capital is a credit-derivative product company (CDPC) that primarily sells credit protection on a highly rated portfolio of tranches of corporate, sovereign, and supranational credit risk. Channel Capital was initially launched in 2007, and has a relatively small credit default swap (CDS) portfolio and a relatively low leverage ratio. The vast majority of its reference companies are investment grade. As of Oct. 31, 2012, the CDS portfolio had a total notional value of EUR9.8 billion, with the last swap maturing within 4.5 years.

We will continue to review whether, in our view, the current ratings on Channel Capital remain consistent with the credit enhancement available to support them, and we will take rating actions as we deem necessary.

RELATED CRITERIA AND RESEARCH

-- Various Rating Actions Taken On Six Global Credit Derivative Product Companies, June, 21, 2010

-- General Criteria: Methodology: Credit Stability Criteria, May 3, 2010

-- Updated Methodology And Assumptions For Rating Global Credit Derivative Product Companies, April, 27, 2010

-- New Issue: Channel Capital PLC, Oct. 1, 2007

-- Modeling Credit Derivative Product Companies Requires Complete Risk Analysis, April 30, 2007

-- Criteria For Rating Global Credit Derivative Product Companies, Nov. 4, 2005

RATINGS LIST

Channel Capital PLC

Ratings Affirmed

Issuer Credit Rating AA-/Stable/A-1+

Program Rating

Senior Secured Debt BBB (sf)

$150 Million Floating-Rate And Senior Capital Notes AA- (sf)

$100 Million Floating-Rate And Senior Capital Notes A (sf)

$50 Million Floating-Rate And Senior Capital Notes BBB (sf)

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