NEW YORK - (Business Wire) Fitch Ratings has downgraded the following series of notes issued by Primoris SPC Ltd. ('Primoris') and removed all classes from Rating Watch Negative. The rating actions reflect Fitch's view on the credit risk of the rated notes following the release of its new Corporate CDO rating Criteria.
--USD160,000,000 series A1-7 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--USD 30,000,000 series A1-7-2 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--USD 50,000,000 series AS1-7-2 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--EUR 17,500,000 series A2-7 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--JPY 2,000,000,000 series A3-7 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--CHF 10,000,000 series A5-7 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--GBP 10,000,000 series A6-7 floating rate credit linked secured notes due 2014, to 'B' from 'AAA';
--USD 5,000,000 series B1-7 floating rate credit linked secured notes due 2014, to 'B-' from 'AA';
--USD 10,000,000 series B1-7-2 floating rate credit linked secured notes due 2014, to 'B-' from 'AA';
--EUR 300,000 series B2-7 floating rate credit linked secured notes due 2014, to 'B-' from 'AA';
--JPY 4,100,000,000 series B3-7 floating rate credit linked secured notes due 2014, to 'B-' from 'AA';
--JPY 500,000,000 series C3-7 floating rate credit linked secured notes due 2014, to 'CCC' from 'AA-';
--USD 10,000,000 series D1-7-2 floating rate credit linked secured notes due 2014, to 'CCC' from 'A';
--JPY 1,000,000,000 series E3-7 floating rate credit linked secured notes due 2014, to 'CC' from 'A-';
--EUR 20,000,000 series B2-10-2 floating rate credit linked secured notes due 2017, to 'B-' from 'AA';
--USD 10,000,000 series D1-10 floating rate credit linked secured notes due 2017, to 'CCC' from 'A';
--JPY 1,000,000,000 series D3-10 floating rate credit linked secured notes due 2017, to 'CCC' from 'A';
--USD 30,000,000 series F1-10 floating rate credit linked secured notes due 2017, to 'CC' from 'BBB'.
Additionally, the JPY 500,000,000 series A3-10-2 class has been paid-in-full (PIF) since the last rating action.
Key drivers of this transaction's credit risk with respect to the long portfolio include:
--Loss of credit enhancement since closing. As of the latest trustee report, credit enhancement for each series of notes had declined by approximately 2.0% on a net basis (usually representing at least a 40% relative reduction in credit enhancement for each series of notes). When the notes were placed on Rating Watch in May 2008, credit enhancement for the notes had declined by at least 1.1% on a net basis (usually representing at least a 20% relative reduction in credit enhancement for each series of notes).
--Portfolio credit risk with an average portfolio quality of 'BBB+/BBB', with 9.6% of the long portfolio rated below investment grade.
--Portfolio migration risk with 10.3% of the long portfolio on Rating Watch Negative and 22.5% of the long portfolio with a Negative Outlook.
--Significant industry concentration in the long portfolio of 46.4% in the underperforming sector of Banking and Finance.
--Emerging market concentration of 9.1%.
Given Fitch's view of concentration risk and the current credit quality of the portfolio, the current credit enhancement levels are not sufficient to justify the current ratings of these notes. Current credit enhancement levels for the notes range from 1.2% to 2.8%.
Primoris is a synthetic securitization that consists of a long portfolio (long component), which initially referenced mostly investment-grade corporates, and a short portfolio (short component), which initially referenced mostly senior-secured bank loans at 10% of the notional amount of the long component. Currently the short portfolio consists of a 9.2% bucket of senior unsecured investment grade bonds. At closing, the issuer entered into a portfolio credit default swap with Deutsche Bank AG, the swap counterparty, (rated 'F1+/AA-' by Fitch), which bought protection from the issuer on the long component of the reference portfolio and sold protection to the issuer on the short component in exchange for a net periodic premium. Under the swap agreement, losses from defaults in the long portfolio and losses from trading activity reduce the credit enhancement of the tranches, while losses from defaults in the short portfolio and gains from trading activity increase the credit enhancement of the tranches. If aggregate losses exceed the related class subordination amount, the affected tranche will be written down and loss payments will be due from the issuer to the swap counterparty. The portfolio is currently managed by Deutsche Asset Management (DeAM) (rated 'CAM1-' by Fitch). While the portfolio was originally managed by State Street Global Advisors, recent amendments have instated DeAM as the replacement manager.
Fitch released updated criteria on April 30, 2008 for Corporate CDOs and, at that time, noted it would be reviewing its ratings accordingly to establish consistency for existing and new transactions. As part of this review, Fitch makes standard adjustments for any names on Rating Watch Negative or Outlook Negative, reducing such ratings for default analysis purposes by two notches and one notch, respectively. Fitch has noted its review will be focused first on ratings most exposed to risks it has highlighted in its updated criteria. Consequently, the notes were placed on Rating Watch Negative on May 22, 2008. As previously indicated, resolution of the Negative Watch status depends on any plans managers/arrangers may choose to modify either the structure or the portfolio. In this case, the original manager was replaced by Deutsche Asset Management and nearly 17% of the portfolio was traded.
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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