TEXT-S&P assign 'srb' rtg to Deutsche Bank's US CDS tranches B & C

Mon Dec 31, 2012 7:02am EST

Dec 31 -

OVERVIEW

-- We have assigned our 'Asrb (sf)' rating to the $6.5 million credit default swap tranche B, and our 'BBBsrb (sf)' rating to the $65.0 million credit default swap tranche C.

-- The senior tranche A and the junior tranche D are unrated.

-- Tranches A, B, C, and D reference a revolving portfolio of U.S. ABS.

-- Our 'srb' ratings (single counterparty--protection buyer) take into account the creditworthiness of the reference portfolio, and the protection buyer (Deutsche Bank ). It does not address the specific amount of termination payments that would be payable under the credit default swap.

Standard & Poor's Ratings Services today has assigned its 'Asrb (sf)' (single counterparty--protection buyer) rating to the $6.5 million credit default swap (CDS) tranche B, and its 'BBBsrb (sf)' rating to the $65.0 million CDS tranche C (see list below). Deutsche Bank AG (A+/Negative/A-1) has retained the unrated CDS senior tranche A and the CDS junior tranche D.

Our swap risk ratings (single counterparty--protection buyer) on the mezzanine tranches B and C only take into consideration the creditworthiness of the reference portfolio and Deutsche Bank as protection buyer. It does not address the specific amount of termination payments that would be payable under the swap transaction.

Tranches A, B, C and D reference a revolving portfolio of U.S. asset backed securities (ABS) acquired by Deutsche Bank. The portfolio notional amount at closing was about $527.0 million, and comprises corporate collateralized debt obligations (CDOs) (11.1%), residential mortgage-backed securities (RMBS) (23.3%), commercial mortgage-backed securities (CMBS) (36.0%), asset-backed securities (ABS) (8.5%) and CDOs of ABS (21.1%). The portfolio notional amount of $527.0 million is allocated between the swap tranches A (31.9%), B (1.2%), C (12.3%), and D (54.5%). Tranche A is the senior most tranche, followed by tranches B, C, and D, respectively.

Under the CDS' terms Deutsche Bank has purchased credit protection on the reference portfolio directly from the investors of tranches B and C by entering into a CDS using the "pay as you go" (PAUG) International Swaps and Derivatives Association, Inc.'s framework. In return for selling credit protection, the tranche B and C investors receive a monthly premium from Deutsche Bank. The tranche B and C notional amounts are held in an account with Deutsche Bank, while tranches A and D are unfunded.

The applicable floating events for which protection is bought are a principal shortfall and/or a write-down event on the underlying reference obligations. Any principal shortfalls, write-down amounts, and trading losses are allocated to the tranches in reverse order of seniority, starting with tranche D. Conversely, trading gains, reimbursements of principal shortfalls, or reversals of write-down amounts on the underlying reference obligations are used to reduce losses allocated to the tranches in order of seniority, starting with tranche A.

Under the terms of the CDS, Deutsche Bank can add or remove reference obligations until Dec. 17, 2015, with the effect that the reference portfolio can grow to a maximum size of $4.33 billion. Any change in the portfolio notional amount resulting from additions or removals during the three-year revolving period will result in a corresponding adjustment of the tranche A and D notional amounts. Following the three-year revolving period, only asset removals can occur, and any principal distributions from the underlying reference obligations are applied to reduce the CDS tranche outstanding notional amounts in order of seniority, starting with tranche A. Following the full reduction of the tranche A notional amount, the tranche B, and then the tranche C will be repaid at their respective outstanding amounts by withdrawing the corresponding amounts from the accounts held with Deutsche Bank.

Portfolio changes and adjustments to tranches A and D are subject to certain requirements outlined in the transaction's documents. These requirements include, among others, a condition to maintain or improve the synthetic rated overcollateralization (SROC) ratio at the initial rating level. The SROC is a measurement of the credit enhancement available for a particular tranche measured against the credit enhancement that we believe is appropriate for a rating level. SROC accounts for a range of factors, including: current portfolio default risk, recoveries, and levels of available credit enhancement, including trading gains or losses resulting from portfolio changes.

Our ratings on tranches B and C reflect the credit enhancement available to these tranches, taking into consideration the credit quality of the portfolio, the protection buyer's requirement to maintain the SROC ratio at the initial rating level during their trading activity, the potential increase in the reference portfolio and the associated increase of the leverage, and the creditworthiness of Deutsche Bank as protection buyer.

We have applied our criteria for rating CDOs of structured finance assets (see "Global CDOs Of Pooled Structured Finance Assets: Methodology And Assumptions," published on Feb. 21, 2012). Our portfolio analysis is based using our latest applicable CDO Evaluator model version 6.0.1.

RELATED CRITERIA AND RESEARCH

Related Criteria

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

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

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

-- Revised Methodologies And Assumptions For Global Synthetic CDO Surveillance, Sept. 30, 2010

-- Revised Assumptions For Structured Finance Assets With Ratings On CreditWatch And Held Within CDO Transactions, April 6, 2009

-- The Use Of Rating-Based Haircuts In Event Of Default Overcollateralization Tests For CDOs, March 19, 2008

-- Criteria For Rating Synthetic CDO Transactions: CDS Documentation, Sept. 1, 2004

-- Criteria for Rating Synthetic CDO Transactions: Trading And Management, Sept. 1, 2004

Related Research

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

-- Swap Risk Ratings Introduced For Synthetic CDO And Credit Derivative Transactions, Sept. 14, 2006

-- 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

-- CDO Spotlight: ISDA's CDS of ABS Templates Scrutinized, Dec. 1, 2005

RATINGS LIST

Rating

SWAP RISK RATINGS ASSIGNED

Credit Default Swap

$6.5 Million Tranche B

Asrb (sf)

Credit Default Swap

$65.0 Million Tranche C

BBBsrb (sf)

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