TEXT - Fitch affirms Malibu Loan Fund Ltd
(The following statement was released by the rating agency) Feb 4 - Fitch Ratings has affirmed the $57,200,500 of notes issued by Malibu Loan Fund, Ltd. (Malibu) at 'CCCsf'. The affirmation reflects Fitch's analysis of both the market value (MV) and the credit risk of the portfolio. Given the exposure to both risks, the tranches are generally rated to the lower of the two indicative levels. The notes' rating was primarily determined by comparing the credit risk of the portfolio to the current credit enhancement available to the notes. The credit risk of the portfolio was analyzed using the Portfolio Credit Model (PCM), as described in Fitch's Corporate CDO criteria. PCM projects the portfolio's loss rates (due to default and recovery) that may be experienced under various rating stresses. The credit enhancement of the notes, which measures the amount of realized losses that can occur before the notes are undercollateralized, was then compared to the PCM's loss rates. Based on Fitch's PCM analysis, the credit enhancement to the notes of approximately 4.2% falls below the portfolio's 'CCCsf' rating loss rate. Due to the presence of excess spread in the transaction and the manager's ability to infuse cash into the transaction, however, Fitch views the credit risk to be consistent with a 'CCCsf' rating. The MV risk was analyzed by comparing the distance-to-trigger (DTT) metric of 11.7% to advance rate (AR) ranges, which is in line with a 'B' stress. As of the trustee report dated Dec. 31, 2012, the net collateral value (NCV) of the eligible collateral account was reported to be approximately $69.2 million. The NCV is equal to the sum of the MV of the eligible collateral and the unrealized MV gains or losses of the reference portfolio. The DTT metric indicates the price decline stress that would occur before triggering a termination event, which occurs when the NCV falls below $27 million (the termination threshold). The trigger is structured 'inside the tranche', such that the transaction may unwind with a substantial loss to the rated notes if breached. The AR ranges are based on Fitch's analysis of the market dislocation experienced in 2007-2008, and represent a peak-to-trough decline. The worst case peak-to-trough price decline observed in loans during that timeframe was approximately 15%, which Fitch viewed as a 'BB' stress. Fitch's analysis of the MV risk begins with a categorization of portfolio loan assets based on the seniority level of the loan and/or their market price, which is then used to determine the AR thresholds under various rating stresses. A senior secured first lien loan priced above 85% of par would be classified as Category 2, and the AR applied to a Category 2 asset under a 'BB' stress would be 85%. A covenant-light loan or a loan that is priced between 70% and 85% of par would be classified as Category 3, in which an AR of 73% would apply in a 'BB' stress. A loan that is priced below 70% of par would be classified as Category 4, and an AR of 51% would apply in a 'BB' stress. Fitch also assumed that price declines under a 'B' stress would be approximately half of the observed 'BB' stress, implying that the price decline for a Category 2 asset would be approximately 7.5%. Therefore, the ARs for Category 2, 3, and 4 assets would be 92%, 85% and 75%, respectively, under a 'B' stress. This analysis is further supplemented in Fitch's May 2008 commentary, 'Fitch Update: Application of Revised Market Value Structure Criteria to TRR CLOs'. Based on Fitch's classification of the portfolio assets, Malibu's portfolio is composed of the following: --83.6% Category 2 assets; --14.8% Category 3 assets; --1.6% Category 4 assets. The weighted average AR of the current portfolio (as of the Dec. 31, 2012 trustee report) is approximately 90.7% under a 'B' stress, which corresponds to an MV decline of 9.3%. Based on Fitch's classification of the assets, the DTT of 11.7% falls within Fitch's 'B' stress for the structure. In addition, sensitivity to MV risk still remains high, as the amount of long-dated assets is 25.2%. The increased exposure to long-dated assets implies potential MV risk upon the maturity of the program. The manager has made multiple infusions of cash collateral to increase Malibu's cushion to its distribution threshold - a mechanism that traps excess spread generated from the reference portfolio to invest in additional collateral. The manager had injected amounts up to approximately $165.3 million in cash on multiple occasions to avoid breach of the distribution threshold during the credit crisis. Malibu Loan Fund, Ltd. is a synthetic total rate of return collateralized loan obligation (CLO) with an MV termination trigger. The transaction closed on Sept. 30, 2005 and is managed by Aegon USA Investment Management. The notes began to experience negative net asset value coverage in 2008, but subsequently benefited from cash infusions which were designed to increase the distance to the distribution and termination thresholds. In May 2012, the transaction was amended and the maximum permitted aggregate notional amount of Malibu Loan Fund was lowered from $700 million to $400 million, in addition to lowering the rated note balance from $110.8 million to $57 million. The transaction remains in its reinvestment period until November 2014. (Caryn Trokie, New York Ratings Unit)
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