TEXT-S&P takes various rating actions in Intercontinental CDO

Mon Dec 24, 2012 8:50am EST

Dec 24 -

OVERVIEW

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

-- We have noted a significant increase in portfolio concentration in the transaction due to deleveraging in the transaction, and have therefore taken various rating actions on all classes of notes.

-- Intercontinental CDO is a cash flow CLO transaction that securitizes loans to primarily speculative-grade corporate firms, with collateral managed by Pacific Investment Management Co. LLC.

Standard & Poor's Ratings Services today took various credit rating actions on all rated classes of notes in Intercontinental CDO S.A.

Specifically, we have:

-- Withdrawn our 'AAA (sf)' ratings on the class A-2 and A-3 notes;

-- Lowered to 'BBB+ (sf)' from 'A- (sf)' our ratings on the class B-1 and B-2 notes;

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

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

-- Affirmed our 'CC (sf)' ratings on the preferred securities and combination notes I, II, and IV (see list below).

Today's rating actions follow our review of the transaction's performance by applying our credit and cash flow analysis and our relevant criteria for transactions of this type. These criteria include "Update To Global Methodologies And Assumptions For Corporate Cash Flow and Synthetic CDOs," published on Sept. 17, 2009, and "Counterparty Risk Framework Methodology And Assumptions," published on Nov. 29, 2012.

Following our analysis and since our previous review in 2011, we have observed that the credit quality of the portfolio has weakened due to increased concentration risk. The transaction has significantly deleveraged due to the pay-down of the class A-2 and A-3 notes. Since our previous review, the proportion of assets rated in the 'CCC' category (rated 'CCC+', 'CCC', or 'CCC-') has however decreased to 0.00% from 15.59%. At the same time the level of defaulted assets (assets from obligors rated 'CC', 'SD' [selective default], or 'D') has increased to 23.41% from 3.17%. Credit enhancement has increased for all classes of notes. At the same time, we have observed a decrease in the transaction's weighted-average spread.

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

Our ratings on the class B-1, B-2, C, and D 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. The results of the largest obligor test reflect the materially increased concentration in the portfolio, compared with our previous review. Although the BDRs generated by our cash flow model indicated higher ratings, the largest obligor test effectively capped the ratings on the class B-1 and B-2 notes at 'BBB+ (sf)', on the class C notes at 'B+ (sf)', and on the class D notes at 'CCC+ (sf)'. We have therefore lowered our ratings on the class B-1, B-2, C, and D notes accordingly.

At the same time, our analysis indicates that the levels of credit enhancement available for the preferred securities and combo I, II, and IV notes, remain commensurate with their current ratings. We have therefore affirmed our ratings on these classes of notes at 'CC (sf)'.

Since our last review, the issuer has fully repaid the class A-2 and A-3 note balance that was outstanding. We have therefore withdrawn our ratings on these classes of notes.

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 Nov. 29, 2012).

Intercontinental CDO is a cash flow collateralized loan obligation (CLO) transaction that closed in May 2002. The portfolio comprises euro-denominated loans to primarily speculative-grade corporate firms and is managed by Pacific Investment Management Co. LLC.

RELATED CRITERIA AND RESEARCH

Related Criteria

-- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012

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

-- 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

-- CDO Spotlight: Issues In Rating Combination Notes In Cash Flow CDOs, March 4, 2004

Related Research

-- 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

-- Transaction Update: Intercontinental CDO S.A., Oct. 28, 2011

-- Credit Rating Model: Extreme Value Theory Foreign Exchange Model, Aug. 17, 2010

RATINGS LIST

Intercontinental CDO S.A.

EUR405 Million Fixed- And Floating-Rate Notes

Class Rating

To From

Ratings Withdrawn

A-2 NR AAA (sf)

A-3 NR AAA (sf)

Ratings Lowered

B-1 BBB+ (sf) A- (sf)

B-2 BBB+ (sf) A- (sf)

C B+ (sf) BB+ (sf)

D CCC+ (sf) B+ (sf)

Ratings Affirmed

Preferred Securities CC (sf)

Comb I CC (sf)

Comb II CC (sf)

Comb IV CC (sf)

NR--Not rated.

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