RPT-Fitch downgrades Eurosail-UK 2007-5 Classes B1c, C1c and D1c to 'Dsf' on Restructuring

Tue Dec 3, 2013 7:45am EST

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Dec 3 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has downgraded classes B1c, C1c and D1c of Eurosail-UK 2007-5NP Plc to 'Dsf' and placed Classes A1a and A1c on Rating Watch Positive (RWP), following a restructuring of the transaction, as follows:

Class A1a (ISIN XS0328024608): 'CCsf'; placed on Rating Watch Positive

Class A1c (ISIN XS0328025241): 'CCsf'; placed on Rating Watch Positive

Class B1c (ISIN XS0328025324): downgraded to 'Dsf' from 'Csf'

Class C1c (ISIN XS0328025597): downgraded to 'Dsf' from 'Csf'

Class D1c (ISIN XS0328025670): downgraded to 'Dsf' from 'Csf'

On 21 November 2013, the issuer received USD35.1m through an auction of its remaining claims against the Lehman Brothers bankruptcy estate in respect of the transaction's terminated EUR/GBP currency hedging agreement. Combined with prior claims received to date of USD67.7m, the issuer has now received all of its expected recoveries, equivalent to 60% of its agreed claim amount as stipulated in the termination and settlement agreement with the Lehman estate.

Subsequently, the issuer, in conjunction with noteholders, has applied all of these proceeds (USD102.8m) towards a restructuring of the transaction.

KEY RATING DRIVERS

The issuer, with the agreement of noteholders, has converted the recoveries to a GBP equivalent amount of GBP63.5m and subsequently aggregated this with the transaction's existing fully funded GBP16.1m cash reserve. As part of the restructure, the A1a tranche has been redenominated at the spot rate (as of the First Amendment and Restructuring Agreement date falling on 26 November 2013) to sterling from euros, leading to an outstanding Class A1a balance of GBP348.3m (previously EUR415.6m). Simultaneously, each of the mezzanine and junior B1c, C1c and D1c tranches have been written-down by 27.7% to a remaining outstanding amount of GBP21m, GBP13.5m and GBP9.6m respectively.

Although the write-down on these notes is apparently voluntary, Fitch has determined that a distressed debt exchange (DDE) has resulted from the restructuring of the Class B1c, C1c and D1c notes. The write-downs (which are irreversible) have effectively brought forward a probable final payment default on these notes and will, by definition, cause a reduction in the original economic terms from the noteholders' perspective. It is therefore considered by the agency to be distressed in nature, resulting in today's downgrade to 'Dsf'.

In contrast, in the agency's view, the restructuring of the Class A1a notes does not constitute a DDE. The redenomination was conducted at the spot rate of 0.838 GBP = 1 EUR (which is higher than the original rate of 0.701 GBP = 1 EUR). The notes will also receive 3 month LIBOR instead of 3 month Euribor with a 7 basis points increase in margin, which represents an increased coupon at current rates. Additionally, the restructuring eliminates ongoing uncertainty to the transaction from its unhedged exposure to currency risk and resulting under-collateralisation. It will also contribute positively towards available credit support for the notes, particularly the senior tranches.

Given the legal final maturity of the notes is far into the future and given the uncertainty of the path of future foreign exchange movements, it is uncertain whether the recoveries from the Lehman bankruptcy estate would have been sufficient to prevent the Class A1a and Class A1c notes from ultimately defaulting had the Class A1a remained denominated in EUR. However, given the fairly favourable terms of the redenomination to GBP for these notes and the lack of any write-down, Fitch has taken the view that a DDE has not occurred in relation to the Class A1a and Class A1c notes.

The RWP is thus reflective of potential upgrades following the notable increase in credit enhancement levels for these notes.

RATING SENSITIVITIES

On the upcoming payment date falling on 13 December 2013, the available cash will be applied towards payment of restructuring costs, payment to residual certificate holders, establishment of a smaller GBP4.1m reserve fund and partial redemption on each of the classes of notes. Combined with the quarterly pass-through payment on the Class A notes, an updated capital structure will exist as a result of the restructuring. Fitch will conduct a full analysis on this capital structure and portfolio and expects ratings on Classes A1a and A1c to be upgraded considering the available credit support. The ratings on Classes B1c, C1c and D1c will be raised upon the conclusion of Fitch's analysis of the new structure.

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