Following our analysis, we have observed that the credit quality of the portfolio has weakened. Since our previous review, the proportion of assets rated in the ‘CCC’ category (rated ‘CCC+', ‘CCC’, or ‘CCC-') has increased to 4.83% from 4.45%, and the level of defaulted assets (assets from obligors rated ‘CC’, ‘SD’ [selective default], or ‘D’) has also increased to 2.82% from 0.00%. Credit enhancement has decreased for all classes of notes and we have also noted a material increase in portfolio concentration since our last review. At the same time, the transaction now benefits from shorter weighted-average life and higher weighted-average spread.
We have subjected the transaction’s capital structure to a cash flow analysis to determine the break-even default rates for each rated class at each rating level. We have incorporated a series of cash flow stress scenarios using various default patterns and levels for each liability rating category, in conjunction with different interest stress scenarios.
In our opinion, the credit enhancement available to class A notes is consistent with the rating that we previously assigned. We have therefore affirmed our ‘AA+ (sf)’ rating on the class A notes.
Our ratings on the class B, C, D, and E notes are constrained by the application of the largest obligor test, a supplemental stress test that we introduced in our 2009 cash flow collateralized debt obligation (CDO) criteria (see “Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs,” published on Sept. 17, 2009). This test addresses event and model risk that might be present in the transaction. The results of the largest obligor test reflect the materially increased concentration in the portfolio, compared with the last review in September 2011 (see “Ratings Raised On All Classes Of Notes In Aquilae CLO II Due To Improved Performance”, published Sept. 23, 2011). Although the break-even default rates generated by our cash flow model indicated higher ratings, the largest obligor test effectively capped the ratings on the class B notes at ‘A+ (sf)', on the class C notes at ‘BBB+ (sf)', on the class D notes at ‘BB+ (sf)', and on the class E notes at ‘CCC+ (sf)'. We have therefore lowered our ratings on the class B, C, D, and E notes.
The Bank of New York Mellon (AA-/Negative/A-1+) acts as an account bank and custodian. In our view, the counterparty is appropriately rated to support the ratings on these notes (see “Counterparty Risk Framework Methodology And Assumptions,” published on May 31, 2012).
Aquilae CLO II PLC is a cash flow collateralized loan obligation (CLO) transaction that closed in November 2006. The portfolio comprises euro-denominated loans to primarily speculative-grade corporate firms and is managed by Henderson Global Investors Ltd.
-- S&P Announcement: CDO Evaluator Version 6.0.1 Released, Aug. 7, 2012
-- Counterparty Risk Framework Methodology And Assumptions, May 31, 2012
-- Credit Rating Model: CDO Evaluator 6.0, March 19, 2012
-- 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
-- Ratings Raised On All Classes Of Notes In Aquilae CLO II Due To Improved Performance, Sept. 23, 2011
-- Credit Rating Model: S&P Cash Flow Evaluator, Aug. 17, 2010
-- 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
-- Understanding Standard & Poor’s Rating Definitions, June 3, 2009
-- General Cash Flow Analytics for CDO Securitizations, Aug. 25, 2004
Aquilae CLO II PLC
EUR316.5 Million Floating-Rate And Deferrable Floating-Rate Notes
Class To From
A AA+ (sf)
B A+ (sf) AA (sf)
C BBB+ (sf) A (sf)
D BB+ (sf) BBB- (sf)
E CCC+ (sf) B+ (sf)