-- Raised our rating on the class B notes; and
-- Affirmed our ratings on the class A-1, A-2, C, D, and E notes (see list below).
Today’s rating actions follow our assessment of the transaction’s performance, take into account recent developments in the transaction, and the application of our criteria relevant to this transaction.
For our review of the transaction’s performance, we used data from the trustee report (dated Sept. 20, 2012), in addition to our cash flow analysis. We have taken into account recent developments in the transaction and have applied our2012 counterparty criteria, as well as our 2009 collateralized debt obligation (CDO) cash flow criteria (see “Counterparty Risk Framework Methodology And Assumptions,” published on May 31, 2012, and “Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs,” published on Sept. 17, 2009).
From our analysis, we have observed a marginal change in the credit quality of the portfolio since we last reviewed the transaction (see “Ratings Raised In Highlander Euro CDO As Credit Enhancement Improves; Rating Affirmed In Highlander Euro CDO (Cayman),” published on July 4, 2011). For example, we have observed a decrease in the proportion of assets that we consider to be rated in the ‘CCC’ category (‘CCC+', ‘CCC’, and ‘CCC-') to 11.00% from 12.28%. At the same time, we have observed an increase in the proportion of defaulted assets (those rated ‘CC’, ‘SD’ [selective default], and ‘D’) to 3.72% from 2.10%.
Our analysis indicates that credit enhancement for all classes of notes has marginally changed since our July 2011 review of the transaction. However, the weighted-average spread earned on the collateral pool has increased.
Our analysis also indicates that the weighted-average maturity of the portfolio since our July 2011 review has slightly decreased, which has led to a small reduction in our scenario default rates (SDRs) for all rating categories.
We subjected the capital structure to a cash flow analysis to determine the break-even default rate for each rated tranche. In our analysis, we have used the reported portfolio balance, weighted-average spread, and weighted-average recovery rates that we consider to be appropriate. We have incorporated various cash flow stress scenarios, using alternative default patterns, levels, and timings for each liability rating category (i.e., ‘AAA’, ‘AA’, and ‘BBB’ ratings), in conjunction with different interest rate stress scenarios.
At closing, Highlander Euro CDO entered into perfect asset swap obligations to mitigate currency risks in the transaction.
We consider that the documentation for these swaps does not fully reflect our 2012 counterparty criteria. Therefore, we conducted our cash flow analysis assuming that the transaction does not benefit from the support of the swaps. After conducting our cash flow analysis, we have concluded that the ratings on the class A-1 and A-2 notes can be maintained at their current rating levels. We have therefore affirmed our ratings on these classes of notes.
We have also applied the largest obligor default test, a supplemental stress test that we introduced as part of our 2009 criteria update (see “Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs,” published on Sept. 17, 2009). The test aims to measure the effect on ratings of defaults of a specified number of largest obligors in the portfolio with particular ratings, assuming 5% recoveries. In addition, we applied the largest industry default test, another of our supplemental stress tests. Our cash flow stresses support higher ratings on the class D and E notes. However, the supplemental stress tests constrain our ratings on the class D and E notes at their current rating levels.
Considering all of these factors, our analysis indicates that the credit enhancement available to the class B notes is commensurate with a higher rating than previously assigned. We have therefore raised our rating on the class B notes to ‘A+ (sf)’ from ‘A (sf)'.
Today, we have also affirmed our rating on the class D and E notes to reflect our view that these tranches have adequate credit support to maintain their current rating levels.
Highlander Euro CDO is a cash flow collateralized loan obligation (CLO) transaction that closed in August 2006 and securitizes loans to primarily speculative-grade corporate firms. The reinvestment period for this transaction ended in August 2012.
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012
-- Global CDOs Of Pooled Structured Finance Assets: Methodology And Assumptions, Feb. 21, 2012
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions, June 14, 2011
-- Ratings Raised In Highlander Euro CDO As Credit Enhancement Improves; Rating Affirmed In Highlander Euro CDO (Cayman), July 4, 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 CLO Performance Index Report, published monthly
Highlander Euro CDO B.V.
EUR500 Million Secured Floating-Rate And Subordinated Notes
B A+ (sf) A (sf)
A-1 AAA (sf)
A-2 AA+ (sf)
C BBB- (sf)
D CCC+ (sf)
Highlander Euro CDO (Cayman) Ltd.
EUR38.25 Million Secured Floating-Rate Notes
E CCC- (sf)