Today’s rating actions follow our assessment of the transaction’s performance since our previous review on Dec. 20, 2011 (see “All Ratings Raised On Laurelin II’s European Cash CLO Notes After Review,” published on Dec. 20, 2011).
In our review, we considered recent transaction developments. We included data from the trustee report dated August 2012, along with our ratings database and our cash flow analysis. We applied our 2012 counterparty criteria, our 2009 cash flow CDO criteria, and our 2011 nonsovereign ratings criteria (see “Counterparty Risk Framework Methodology And Assumptions,” published on May 31, 2012;“Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs,” published on Sept. 17, 2009, and “Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions,” published on June 14, 2011 ).
In terms of the portfolio’s credit quality, the level of assets that we consider to be rated in the ‘CCC’ category (‘CCC+', ‘CCC’, or ‘CCC-') has decreased to 6.72% from 9.01%, as a percentage of all assets.
Additionally, the weighted-average life of the assets in the portfolio has decreased to 5.19 years from 5.82 years.
The evolution of those parameters has led to a lower scenario default rate (SDR) for all classes of notes compared with our previous review, as provided by our CDO Evaluator (Version 6.0.1) model. Through a “Monte Carlo” methodology, the CDO Evaluator evaluates a portfolio’s credit quality, considering the issuer credit rating, size, domicile, and maturity date of each asset, and the correlation between each pair of assets. It presents the portfolio’s credit quality in terms of a probability distribution for potential default rates. From this distribution, it derives a set of SDRs that identify, for each rating level, the minimum level of portfolio defaults a class of notes should be able to withstand without defaulting.
We also note that the transaction was negatively affected by a rise in the percentage of defaulted assets (i.e., debt obligations of obligors rated ‘CC’, ‘SD’ [selective default], or ‘D’) to 4.86% from 0.23%.
Following our credit analysis, we subjected the transaction’s capital structure to a cash flow analysis, to determine the break-even default rate for each rated class of notes at each rating level. The tranche BDR and the SDR, provided by CDO Evaluator (Version 6.0.1) model, are the key parameters in our methodology for the rating and the surveillance of CDO transactions.
In our analysis, we used the portfolio balance that we considered to be performing (EUR421.3 million), the reported weighted-average spread (4.08%) and the weighted-average recovery rates as per our 2009 cash flow CDO criteria. We incorporated various cash flow stress scenarios using our standard default patterns, levels, and timings for each rating category assumed for each class of notes, in conjunction with different interest rate and currency stress scenarios.
The issuer has entered into options agreements with Barclays Bank PLC (A+/Negative/A-1).
Our 2012 counterparty criteria provide that in cases where the replacement language in the derivative agreements is in line with any of our previous counterparty criteria, the maximum achievable rating on a tranche is equal to the counterparty’s long-term rating plus one notch (“ICR+1”), unless we apply additional stresses in our cash flow analysis to capture that risk.
Therefore, in our cash flow analysis, we have tested additional scenarios by assuming that there are no options in the transaction for all notes with a rating higher than ICR+1, ‘AA- (sf)', i.e., only the class A-1E, A-1R, A-1S, and A-2 notes.
Where a structured finance transaction invests in assets located in investment-grade sovereigns within the European Economic and Monetary Union (EMU or eurozone), we cap the maximum potential rating at six notches above our rating on the related sovereign, in line with our nonsovereign ratings criteria (see “Nonsovereign Ratings That Exceed EMU Sovereign Ratings: Methodology And Assumptions,” published on June 14, 2011). To assess the amount of securities that can achieve the maximum potential rating, we apply a haircut to the cash flows from assets located in jurisdictions rated below ‘A-', i.e., six notches below a ‘AAA’ rating.
This transaction has an aggregate exposure of approximately 14.19% to assets in Spain (BBB-/Negative/A-3), Italy (unsolicited; BBB+/Negative/A-2), Lithuania (BBB/Stable/A-2), Ireland (BBB+/Negative/A-2), and South Africa (foreign currency; BBB/Negative/A-2).
In accordance with our nonsovereign ratings criteria, to assess how many of the securities in the transaction could achieve the maximum potential rating of ‘AAA (sf)', our aggregate performing balance can only include up to 10% of the assets in jurisdictions rated in the ‘BBB’ rating category. This reduces the aggregate performing balance considered in ‘AAA’ scenarios by EUR17.6 million.
Taking into account the maximum potential six-notch uplift under nonsovereign ratings criteria, the transaction’s sovereign exposure does not constrain our ratings on the class B-1, B-2, C, D-1, D-2, and E notes under our criteria. We have therefore not applied any additional stresses in our cash flow analysis for these classes of notes.
Our analysis shows that the level of credit enhancement available to the class A-1E, A-1R, A-1S, and A-2 notes is commensurate with a ‘AA (sf)’ rating level. Therefore, we have raised to ‘AA (sf)’ our ratings on those classes of notes.
Our analysis shows that the current level of credit enhancement available to the class B-1, B-2, C, D-1, D-2, and E notes remains commensurate with the currently assigned ratings. Therefore, we have affirmed our ratings on these classes of notes.
-- May 2012 European CLO Performance Index Report: The Proportion Of Defaulted Assets Varies Across Vintages, Amid Overall Mixed Performance, Sept. 10, 2012
-- 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
-- All Ratings Raised On Laurelin II’s European Cash CLO Notes After Review, Dec.20, 2011
-- 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 14, 2011
-- 152 Ratings Lowered In 26 European CLO Transactions; $12.52 Billion Of Issuance Affected (Dec. 17, 2009 Review), Dec. 17, 2009
-- Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, Sept. 17, 2009
-- General Cash Flow Analytics for CDO Securitizations, Aug. 25, 2004
-- CDO Spotlight: ‘A-1’ Short-Term Rating Required For Investors In CDO Variable Funding Notes, May 24, 2004
Laurelin II B.V.
EUR405 Million And GBP30.405 Million Secured Floating-Rate Notes
A-1E AA (sf) AA- (sf)
A-1R AA (sf) AA- (sf)
A-1S AA (sf) AA- (sf)
A-2 AA (sf) AA- (sf)
B-1 A+ (sf)
B-2 A+ (sf)
C BBB+ (sf)
D-1 BB+ (sf)
D-2 BB+ (sf)
E BB (sf)