(The following statement was released by the rating agency)
Oct 10 () - Fitch Ratings has affirmed 49 tranches and downgraded two tranches from eight Trust Preferred (TruPS) Collateralized Debt Obligations (CDOs) backed by insurance collateral as outlined in a new report. In addition, Fitch has marked one note as paid in full and maintained Stable Outlooks on 27 tranches rated 'Bsf' and higher.
The rating action report, titled 'Fitch Takes Various Rating Actions on Eight TruPS CDOs', dated Oct. 10, 2012, details the individual rating actions and portfolio characteristics for each rated CDO. It can be found on Fitch's website at ' by performing a title search or by using the link below. For further information and transaction research, please refer to ''.
The key rating drivers for today's rating actions are the relative stability of the underlying credit, deleveraging of the transactions, and the concentrated nature of the portfolios.
Trust preferred securities (TruPS), surplus notes, and other debt issued by these U.S Property and Casualty (P&C) and Life and Health (L&H) insurance companies represent the main credit exposure across these transactions.
Credit quality of the underlying portfolios remained relatively stable. This reflects stabilization in the key rating drivers for many underlying insurance issuers. Over this past year, underwriting trends for P&C insurers have improved. In addition, for many insurers, investment portfolios recovered relatively quickly after the recent financial crisis. Fitch's current outlook for the U.S. P&C and L&H insurance industry is stable.
The combined default and deferral rate decreased slightly to 6.4% of original balance for this review, as compared to 6.5% at last year's review. The slight decrease was due to the sale of two non-performing insurers.
Reflecting the relatively stable credit performance of the underlying portfolios, senior coverage tests in all of the eight CDOs are currently passing. However, in five transactions, mezzanine coverage tests or an optimal principal distribution amount (OPDA) feature have continued to redirect a portion of interest proceeds to pay down the most senior notes.
All transactions had paydowns to the most senior classes due to the combination of the collateral redemptions and excess spread. Further detail on the magnitude of the amortization since last review is provided in today's report.
As shown in the report, most portfolios are relatively concentrated. To account for a potential underperformance of the oversized positions, Fitch applied a sensitivity scenario as described in the criteria report 'Global Surveillance Criteria for TruPS CDOs,' dated July 11, 2012.
Generally, the result of the sensitivity scenario guided assignment of Rating Outlooks, while performance in the base case was used to assign ratings. In addition, for notes that were, in the base case scenario, passing at rating levels higher than their current levels, their performance in the sensitivity scenario prevented a potential upgrade. Given the long-term nature of the portfolio and high degree of the concentration, potential future underperformance from the oversized positions could lead to rating volatility which would be inconsistent with high investment-grade ratings.
Additional information is available at ''. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The information used to assess these ratings was sourced from trustee reports, collateral manager reporting Web sites and the public domain.
Applicable Criteria and Related Criteria:
--'Global Surveillance Criteria for Trust Preferred CDOs' (July 11, 2012);
--'Global Rating Criteria for Corporate CDOs' (Aug. 8, 2012);
--'Counterparty Criteria for Structured Finance Transactions' (May 30, 2012);
--'Criteria for Rating Caps in Global Structured Finance Transactions'(Aug. 2, 2012);
--'Bank TruPS CDO Default and Deferral Index as of June 2012' (July 25, 2012).
Applicable Criteria and Related Research: Fitch Takes Various Rating Actions on Eight Insurance TruPS CDOs
Fitch Bank TruPS CDO Default and Deferral Index (As of June 2012)
Criteria for Rating Caps in Global Structured Finance Transactions
Counterparty Criteria for Structured Finance Transactions
Global Surveillance Criteria for Trust Preferred CDOs
Global Rating Criteria for Corporate CDOs
(New York Ratings Team)