Feb 11 - Fitch Ratings has affirmed CART 1 Ltd (CART) and GATE SME CLO 2006-1 Ltd’s (GATE) notes. The full list of rating actions is provided at the end of this release.
GATE’s performance since the last review in March 2012 has been stable. Additional defaults amount to EUR6.5m, or 0.3% of the initial pool balance. Fitch notes that there has been no significant change in portfolio quality or concentration. Cumulative defaults since closing equal EUR71.7m, or 3.4% of the initial balance.
Compared to GATE, the performance of CART since the last review has worsened. Additional defaults are EUR23.6m, which corresponds to 1.4% of the initial portfolio notional. Cumulative defaults since closing amount to EUR118.8m, or 7.0% of the pool at closing. In Fitch’s view, the portfolio quality has deteriorated since last review, but not significantly.
For both transactions, the credit enhancement levels have decreased marginally since the last review due to losses that were allocated to the junior non-rated notes. In order to analyse the portfolio credit quality of the respective transaction, the agency used its Portfolio Credit Model (PCM), which derives rating-dependent default and recovery rates. In Fitch’s view, the notes’ credit enhancement is commensurate with the current ratings, which led to their affirmation.
The Negative Outlook reflects the transactions’ persisting high vulnerability to the default of a few large obligors (event risk). The current levels of credit protection in both transactions are relatively low. At the same time, the portfolios are very concentrated, so that the available credit enhancement can absorb the default of only a few large obligors. For example, after taking into account expected recoveries the class A notes in GATE and the class A+ in CART could survive the default of only five and seven of the largest obligor groups, respectively.
Both transactions are currently in the replenishing phase. Overcollateralization via subordination is the only source of credit enhancement for the notes. Given the lack of additional protection layers (e.g. synthetic excess spread), realized losses are immediately written against the notes in reverse order of seniority, thus reducing the subordination. Although the realized losses have so far been absorbed by the non-rated junior notes, the agency notes that no additional credit protection can be built up as long as the transactions are replenishing.
Fitch assigns Recovery Estimates (RE) to all notes rated ‘CCCsf’ or below. REs are forward-looking recovery estimates, taking into account Fitch’s expectations for principal repayments on a distressed structured finance security. The REs assigned to the transactions’ notes are given at the end of this press release.
The transactions are partially-funded synthetic CDOs referencing a portfolio of loans, revolving credit facilities and other payment claims to SMEs and larger companies based predominantly in Germany. The debt instruments were originated by Deutsche Bank AG (rated ‘A+'/Stable/‘F1+').
EUR17m class A+ notes (ISIN: XS0306449488): affirmed at ‘BBsf’; Negative Outlook
EUR8.5m class A notes (ISIN: XS0295190721): affirmed at ‘BBsf’; Negative Outlook
EUR51m class B notes (ISIN: XS0295192263): affirmed at ‘Bsf’; Negative Outlook
EUR17m class C notes (ISIN: XS0295192420): affirmed at ‘Bsf’; Negative Outlook
EUR38.25m class D notes (ISIN: XS0295192776): affirmed at ‘CCCsf’; assigned
Recovery Estimate (RE) of ‘RE50%’
EUR48.45m class E notes (ISIN: XS0295193311): affirmed at ‘CCsf’; assigned ‘RE0%’
EUR42m class A notes (ISIN: XS0271959388): affirmed at ‘BBsf’; Negative Outlook
EUR26.5m class B notes (ISIN: XS0271960048): affirmed at ‘B+sf’; Negative Outlook
EUR7.5m class C notes (ISIN: XS0271960550): affirmed at ‘B+sf’; Negative Outlook
EUR20m class D notes (ISIN: XS0271961012): affirmed at ‘CCCsf’; assigned
Recovery Estimate (RE) of ‘RE35%’
EUR15.5m class E notes (ISIN: XS0271961103): affirmed at ‘CCCsf’; assigned ‘RE0%'