Jan 16 -
-- We have observed a deterioration in the transaction's performance.
-- We have therefore lowered our ratings on the class B and C notes.
-- At the same time, we have affirmed our ratings on all the other classes of notes.
-- Invesco Mezzano is a cash flow CLO transaction that closed on Oct. 30, 2007, with a reinvestment period that ends in November 2013.
Standard & Poor's Ratings Services today lowered its credit ratings on Invesco Mezzano B.V.'s class B and C notes. At the same time, we have affirmed our ratings on all other classes of notes in this transaction (see list below).
Today's rating actions follow our assessment of the transaction's performance using data from the trustee report dated Nov. 30, 2012, as well as a cash flow analysis. We have taken into account recent developments in the transaction and reviewed the transaction under our 2012 counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on Nov. 29, 2012).
From our analysis, we have observed a fall in the aggregate collateral balance to EUR319.4 million from EUR327.9 million. This has decreased the credit enhancement available for all classes of notes since our previous rating action on Oct. 5, 2011 (see "Transaction Update: Invesco Mezzano B.V.").
The November 2012 trustee report indicates that the overcollateralization test results for all classes have worsened. In addition, we have observed a deterioration in the credit quality of the portfolio, such as an increase in defaulted assets (rated 'CC', C', 'SD' [selective default], or 'D') to 2.3% from 0% and an increase in assets rated in the 'CCC' category ('CCC+', 'CCC', or 'CCC-') to 5.55% from 4.10%.
We have also observed that the weighted-average spread the portfolio generates has increased to 3.63% from 3.20%, and that the weighted-average life has decreased to 4.2 years from 5.0 years. In addition, we note that the weighted-average recovery rates have decreased.
We subjected the capital structure to a cash flow analysis to determine the break-even default rate for each rated class. In our analysis, we used the reported portfolio balance that we consider to be performing, the current weighted-average spread and the weighted-average recovery rates that we considered to be appropriate. We incorporated various cash flow stress scenarios using alternative default patterns, levels, and timings for each liability rating category, in conjunction with different interest stress scenarios.
Following our cash flow analysis, we consider the level of credit enhancement available to the class B and C notes to be commensurate with lower ratings than those currently assigned. We have therefore lowered our ratings on the class B notes to 'A- (sf)' from 'A (sf)' and on the class C notes to 'BB+ (sf)' from 'BBB- (sf)'.
The credit support for the class A, D, and E notes is, in our opinion, commensurate with our current ratings on these classes. We have therefore affirmed our ratings on the class A, D, and E notes.
Approximately 8% of the assets in the transaction's portfolio are non-euro-denominated, while the liabilities are all euro-denominated. To mitigate the risk of foreign-exchange-related losses, the issuer has entered into foreign exchange swap agreements with Morgan Stanley & Co international PLC (A/Negative/A-1) as a swap counterparty. Under our 2012 counterparty criteria, our analysis of the swap counterparty and its associated documentation indicates that, absent other mitigants, it cannot support ratings on the notes that are higher than 'A+ (sf)'.
To assess the potential impact on our ratings, we have conducted our analysis without giving benefit to the swap agreements. We concluded that, in this scenario, the class A notes would only be able to achieve a 'A+ (sf)' rating.
Invesco Mezzano is a cash flow collateralized loan obligation (CLO) transaction that securitizes loans to primarily speculative-grade corporate firms. The transaction closed in October 2007 and is managed by Invesco Asset Management Ltd.
RELATED CRITERIA AND RESEARCH
-- Counterparty Risk Framework Methodology And Assumptions, Nov. 29, 2012
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009
-- CDO Spotlight: General Cash Flow Analytics for CDO Securitizations, Aug. 25, 2004
-- 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: Invesco Mezzano B.V., Oct. 5, 2011
Invesco Mezzano B.V.
EUR350.45 Million Senior And Deferrable Interest Floating-Rate Notes
B A- (sf) A (sf)
C BB+ (sf) BBB- (sf)
A A+ (sf)
D BB+ (sf)
E B+ (sf)