(The following statement was released by the rating agency)
Feb 4 - Fitch Ratings has affirmed the $57,200,500 of notes issued by Malibu
Loan Fund, Ltd. (Malibu) at 'CCCsf'.
The affirmation reflects Fitch's analysis of both the market value (MV) and the
credit risk of the portfolio. Given the exposure to both risks, the tranches are
generally rated to the lower of the two indicative levels.
The notes' rating was primarily determined by comparing the credit risk of the
portfolio to the current credit enhancement available to the notes. The credit
risk of the portfolio was analyzed using the Portfolio Credit Model (PCM), as
described in Fitch's Corporate CDO criteria. PCM projects the portfolio's loss
rates (due to default and recovery) that may be experienced under various rating
stresses. The credit enhancement of the notes, which measures the amount of
realized losses that can occur before the notes are undercollateralized, was
then compared to the PCM's loss rates. Based on Fitch's PCM analysis, the credit
enhancement to the notes of approximately 4.2% falls below the portfolio's
'CCCsf' rating loss rate. Due to the presence of excess spread in the
transaction and the manager's ability to infuse cash into the transaction,
however, Fitch views the credit risk to be consistent with a 'CCCsf' rating.
The MV risk was analyzed by comparing the distance-to-trigger (DTT) metric of
11.7% to advance rate (AR) ranges, which is in line with a 'B' stress. As of the
trustee report dated Dec. 31, 2012, the net collateral value (NCV) of the
eligible collateral account was reported to be approximately $69.2 million. The
NCV is equal to the sum of the MV of the eligible collateral and the unrealized
MV gains or losses of the reference portfolio. The DTT metric indicates the
price decline stress that would occur before triggering a termination event,
which occurs when the NCV falls below $27 million (the termination threshold).
The trigger is structured 'inside the tranche', such that the transaction may
unwind with a substantial loss to the rated notes if breached.
The AR ranges are based on Fitch's analysis of the market dislocation
experienced in 2007-2008, and represent a peak-to-trough decline. The worst case
peak-to-trough price decline observed in loans during that timeframe was
approximately 15%, which Fitch viewed as a 'BB' stress. Fitch's analysis of the
MV risk begins with a categorization of portfolio loan assets based on the
seniority level of the loan and/or their market price, which is then used to
determine the AR thresholds under various rating stresses. A senior secured
first lien loan priced above 85% of par would be classified as Category 2, and
the AR applied to a Category 2 asset under a 'BB' stress would be 85%. A
covenant-light loan or a loan that is priced between 70% and 85% of par would be
classified as Category 3, in which an AR of 73% would apply in a 'BB' stress.
A loan that is priced below 70% of par would be classified as Category 4, and an
AR of 51% would apply in a 'BB' stress. Fitch also assumed that price declines
under a 'B' stress would be approximately half of the observed 'BB' stress,
implying that the price decline for a Category 2 asset would be approximately
7.5%. Therefore, the ARs for Category 2, 3, and 4 assets would be 92%, 85% and
75%, respectively, under a 'B' stress. This analysis is further supplemented in
Fitch's May 2008 commentary, 'Fitch Update: Application of Revised Market Value
Structure Criteria to TRR CLOs'.
Based on Fitch's classification of the portfolio assets, Malibu's portfolio is
composed of the following:
--83.6% Category 2 assets;
--14.8% Category 3 assets;
--1.6% Category 4 assets.
The weighted average AR of the current portfolio (as of the Dec. 31, 2012
trustee report) is approximately 90.7% under a 'B' stress, which corresponds to
an MV decline of 9.3%. Based on Fitch's classification of the assets, the DTT of
11.7% falls within Fitch's 'B' stress for the structure. In addition,
sensitivity to MV risk still remains high, as the amount of long-dated assets is
25.2%. The increased exposure to long-dated assets implies potential MV risk
upon the maturity of the program.
The manager has made multiple infusions of cash collateral to increase Malibu's
cushion to its distribution threshold - a mechanism that traps excess spread
generated from the reference portfolio to invest in additional collateral. The
manager had injected amounts up to approximately $165.3 million in cash on
multiple occasions to avoid breach of the distribution threshold during the
Malibu Loan Fund, Ltd. is a synthetic total rate of return collateralized loan
obligation (CLO) with an MV termination trigger. The transaction closed on Sept.
30, 2005 and is managed by Aegon USA Investment Management. The notes began to
experience negative net asset value coverage in 2008, but subsequently benefited
from cash infusions which were designed to increase the distance to the
distribution and termination thresholds. In May 2012, the transaction was
amended and the maximum permitted aggregate notional amount of Malibu Loan Fund
was lowered from $700 million to $400 million, in addition to lowering the rated
note balance from $110.8 million to $57 million. The transaction remains in its
reinvestment period until November 2014.
(Caryn Trokie, New York Ratings Unit)