NEW YORK - (Business Wire) Fitch Ratings has today downgraded the class A1, A2, B, C, D, E, F, G, and H notes from Sydney Street Finance Limited (Sydney Street), and removed them from Rating Watch Negative:
-- EUR70,000,000 Class A1 to 'BBB' from 'AAA';
-- EUR66,700,000 Class A2 to 'BB' from 'AAA';
-- EUR60,000,000 Class B to 'B+' from 'AA+';
-- EUR46,700,000 Class C to 'B-' from 'AA';
-- EUR44,000,000 Class D to 'CCC' from 'AA-';
-- EUR26,700,000 Class E to 'CC' from 'A';
-- EUR21,350,000 Class F to 'CC' from 'A-';
-- EUR21,350,000 Class G to 'CC' from 'BBB';
-- EUR20,000,000 Class H to 'CC' from 'BB+'.
All classes were originally placed on Rating Watch Negative on March 27, 2008.
For purposes of this review, Fitch analyzed the asset-backed securities (ABS) portion of the portfolio using criteria outlined in 'Global Criteria for the Review of Structured Finance CDOs with Exposure to US Subprime RMBS' dated Nov. 15, 2007, while analyzing the corporate portion of the portfolio using the criteria outlined in 'Global Criteria for Corporate CDOs' dated April 30, 2008. Fitch combined Rating Loss Rates (required credit enhancement levels) from Vector 3.2 for the ABS portion of the portfolio with Rating Loss Rates from Fitch's Portfolio Credit Model for the corporate portion of the portfolio. Each model's results were weighted and combined based upon the percent of the portfolio that each asset type represented.
The driving factor behind Fitch's rating action today is higher loss expectations in Sydney Street's U.S. subprime residential mortgage backed securities (RMBS) and structured finance (SF) CDOs. Rapid credit deterioration in US subprime RMBS and SF CDOs, primarily from the 2005, 2006 and 2007 vintages is responsible for 8.6% (all references to % of portfolio from this point forward refer to % of total referenced amount of portfolio) of the portfolio falling from investment grade ratings to 'B+' or lower). This deterioration has also caused the average rating factor of the ABS portfolio to fall from 'A-/BBB+' in March 2007 to 'BB-/B+' currently.
Sydney Street is a managed synthetic collateralized debt obligation (CDO) that references a EUR2 billion portfolio of primarily investment grade corporate bonds referenced via direct investments of 50%, indirectly through ten inner tranche credit default swaps totaling 30%, as well as 20% in various asset backed securities.
The ABS portfolio comprises U.S. subprime RMBS (12.4%), Alternative A (Alt-A) mortgage loans (1.3%)and U.S. SF CDOs (3.4%). U.S. subprime RMBS of the 2005 and 2006 vintages account for approximately 2.6%, and 6.3% of the portfolio, respectively. During the rating action in March 2008, 6.2% of the portfolio was ABS rated 'BB+' or below. As per the portfolio from the latest trustee report from March 2008, 11.8% of the portfolio is ABS rated 'BB+' or below and 3.8% of the portfolio is ABS rated 'CCC+' or below. This compares to current credit enhancement levels (incorporating loss protection from the cash reserve account accrued to date) of 17.4%, 14.1%, 11.1%, 8.8%, 6.6%, 5.2%, 4.2%, 3.1%, and 2.1% for the class A1, A2, B, C, D, E, F, G, and H notes, respectively.
While there have been no credit events called to date in the ABS portfolio, Fitch believes credit events may be called in the near term. KBC, in its capacity as the swap counterparty, has the right to deliver a credit event notice on any of the ABS reference obligors following: failure to pay interest, deferment event, permanent reduction of principal, downgrade to 'C' or lower by the specified rating agencies, and bankruptcy. Additionally, when determining the valuation price for an ABS reference obligation, the valuation must exceed a minimum recovery threshold during any valuation date within two years of the credit event.
The weighted average rating of the direct corporate investments is 'BBB-' compared with 'BBB/BBB-' at closing, while exposure to below investment grade corporate reference entities equals 22.1%, of which 2.8% is in the 'B' rating category or lower. Fitch's corporate CDO review criteria is sensitive to securities on Rating Watch Negative (5.2% of the portfolio) and Negative Outlook (17.1% of the portfolio) and lowers their ratings by two and one notch, respectively in the portfolio credit model. Additionally, results of Fitch's portfolio credit model are impacted by industry concentrations. Sydney Street currently has 24.8% exposure to the Banking & Finance industry (directly and indirectly).
Each of the ten inner tranche CDS comprises 3.0% of the total referenced amount. Additionally, all inner tranche CDS have the same attachment point of 6.0% and detachment point of 12.0%. Weighted average rating factors on each of the inner CDOs range from 'BBB+/BBB' to 'BBB/BBB-'. Most reference entities within each of the ten inner tranche CDS are referenced by 2 to 4 inner tranche CDS and account for less than 0.1% of the portfolio's entire holdings.
The transaction is designed to provide credit protection for realized losses on the reference portfolio through a master credit default swap (CDS) between the issuer and the swap counterparty, KBC Investments Cayman Islands V, Ltd. (KBC). At closing, the issuer entered into a GIC agreement with KBC Investments Hong Kong Limited (guaranteed by KBC Bank), which allows it to redeem collateral at the purchase price of the principal amounts on the maturity date. KBC also has the right, subject to trading guidelines set at the closing of the transaction, to adjust the portfolio via additions, removals and replacements of reference entities and/or reference obligations prior to the scheduled amortization commencement date in July 2015. Trading gains and losses do not impact the credit enhancement levels available to the notes.
The notes have a scheduled maturity date in April 2041. While the notes will absorb losses on the ABS portion of the portfolio until this date, they will only absorb losses on the corporate reference entities for which a credit event notice is delivered prior to July 2015. This rating action incorporates the most recent portfolio including trades made since the notes were placed on Rating Watch Negative in March 2008. There have been no credit events to date.
More details on the structures, counterparties involved and functioning are available on the agency's subscriber web site, www.fitchresearch.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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