Nov 09 -
-- We have reviewed Highlander Euro CDO III's performance by applying our
relevant criteria and conducting our credit and cash flow analysis.
-- Based on our analysis, we have affirmed our ratings on the class A, B,
C, and E notes and lowered our rating on the class D notes.
-- Highlander Euro CDO III is a cash flow CLO transaction that
securitizes loans to primarily speculative-grade corporate firms, with
collateral managed by CELF Advisors LLP.
Standard & Poor's Ratings Services today took various credit rating actions on all rated
classes of notes in Highlander Euro CDO III.
Specifically, we have:
-- Affirmed our 'AA+ (sf)' rating on the class A notes;
-- Affirmed our 'A+ (sf)' rating on the class B notes;
-- Affirmed our 'BBB+ (sf)' rating on the class C notes;
-- Lowered to 'B+ (sf)' from 'BB+ (sf)' our rating on the class D notes;
-- Affirmed our 'CCC+ (sf)' rating on the class E notes.
Today's rating actions follow our review of the transaction's performance by
applying our credit and cash flow analysis, together with our relevant
criteria for transactions of this type.
Following our analysis, we have observed that the overall credit quality of
the portfolio has slightly improved. Since our previous review, the proportion
of assets rated in the 'CCC' category (rated 'CCC+', 'CCC', or 'CCC-') has
decreased to 2.60% from 6.78%, and the level of defaulted assets (assets from
obligors rated 'CC', 'SD' [selective default], or 'D') has increased to 1.57%
from 0.00%. Credit enhancement has slightly decreased for all classes of
notes, since our last review. The transaction now benefits from a shorter
weighted-average life and a materially 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 the class A notes is
consistent with the rating that we have 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. Based on our modified
approach with regard to individual obligors belonging to the same group, we
now perceive the portfolio as more concentrated, compared to our last review
in October 2011 (see "Ratings Raised On Class A To E Notes In Highlander Euro
CDO III Due To Improved Performance; Class Q Rating Withdrawn," published on
Oct. 17, 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 'B+ (sf)', and on the class E notes at
'CCC+ (sf)'. We have therefore affirmed our ratings on the class B, C, and E
notes and lowered our rating on the class D notes to 'B+ (sf)' from 'BB+ (sf)'.
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).
Highlander Euro CDO III entered into a number of derivative agreements to
mitigate currency and interest rate risks in the transaction. We consider the
documentation for these derivatives as not fully compliant with our 2012
counterparty criteria. Therefore, in our cash flow analysis for the class A
notes, we have assumed no benefit from any derivative support. Based on this
analysis, we have affirmed our rating on the class A notes at 'AA+ (sf)'.
Highlander Euro CDO III is a cash flow collateralized loan obligation (CLO)
transaction that closed in April 2007. The portfolio is managed by CELF
RELATED CRITERIA AND RESEARCH
-- 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 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. 14, 2011
-- Ratings Raised On Class A To E Notes In Highlander Euro CDO III Due To
Improved Performance; Class Q Rating Withdrawn, Oct 17, 2011
-- Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology
And Assumptions, June 14, 2011
-- Credit Rating Model: S&P Cash Flow Evaluator, Aug. 17, 2010
-- 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
Highlander Euro CDO III B.V.
EUR800 Million Floating-Rate And Deferrable Floating-Rate Notes
Class To From
A AA+ (sf)
B A+ (sf)
C BBB+ (sf)
E CCC+ (sf)
D B+ (sf) BB+ (sf)