-- 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
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.
RELATED CRITERIA AND RESEARCH
-- 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,
-- 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
-- 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)