NEW YORK - (Business Wire) Fitch Ratings has downgraded the following credit-linked notes issued by Argon Capital Public Limited Company (Argon Series 101):
--$60,0000,000 series 101 limited recourse secured floating-rate credit-linked notes due 2050 to 'BB' from 'A'.
The notes also remain on Rating Watch Negative by Fitch.
Fitch's downgrade reflects the increased likelihood of an early termination of the Argon Series 101 credit default swap (CDS) due to a distressed ratings downgrade credit event, and is therefore linked to the ratings of the underlying reference obligations of Argon Series 101 [the class A-1 and A-2 notes of Kleros Real Estate CDO IV, Ltd. (Kleros RE IV)].
The Argon 101 CDS trades using a modified version of the International Swaps and Derivatives Association Inc.'s (ISDA) CDS on collateralized debt obligations (CDOs) swap confirmation, pursuant to which if either of the reference obligations experiences a credit event, a cash settlement process will begin to determine the final price of the affected asset(s). Per the CDS confirm, a distressed ratings downgrade credit event can be called at the discretion of the protection buyer, Merrill Lynch International (MLI), if the ratings of Kleros RE IV's A-1 or A-2 notes are downgraded to the pre-specified trigger levels by all of the applicable rating agencies identified in the Argon Series 101 transaction documents. The current ratings of the Kleros RE IV class A-1 and A-2 notes indicate an increased likelihood of a distressed ratings downgrade credit event occurring due to the ratings' proximity to these triggers. Upon the occurrence of a distressed ratings downgrade credit event, the Argon Series 101 CDS potentially exposes the noteholders to the market value risk of the Kleros RE IV A-1 or A-2 notes.
The current ratings of the Kleros RE IV class A-2 notes suggest that an early termination due to a distressed ratings downgrade may be more likely than the occurrence of Super Senior Trigger Event, as described below.
Argon Series 101 was initially placed on Rating Watch Negative on April 18 as a result of observed credit deterioration with respect to the collateral underlying Kleros RE IV, including subprime residential mortgage-backed securities (RMBS) and alternative A (Alt-A) mortgage loans from the 2005, 2006 and 2007 vintages. Specifically, the probability of occurrence of a Super Senior Trigger Event, as defined in the transaction's governing documents, had increased materially based on Fitch's analysis. A Super Senior Trigger Event will be deemed to have occurred when aggregate portfolio losses in Kleros RE IV exceed $500 million, or 50% of the initial $1 billion Kleros RE IV portfolio balance. Aggregate portfolio losses are primarily a function of actual defaults and writedowns in the Kleros RE IV portfolio as well as an assumed loss of 70% for all 'C' rated assets.
Since Argon Series 101's closing date, approximately 79% of the underlying Kleros RE IV portfolio has been downgraded, resulting in a portfolio comprised of approximately 40% investment grade assets and 60% non investment grade assets, including 42% assets rated 'CCC+' or below. This is in comparison to the November 2007 trustee report, at which time the portfolio was comprised of approximately 94% investment grade assets, 6% non investment assets, and 0% assets rated 'CCC+' or below. In addition to the observed credit deterioration, 38% of the Kleros RE IV portfolio is currently on Rating Watch Negative.
Argon Series 101 is a leveraged super senior transaction synthetically referencing the class A-1 and A-2 notes of Kleros RE IV. At close, proceeds from the issuance of the $60 million Argon Series 101 notes were used to collateralize a CDS between Argon and MLI. The rating of the Argon Series 101 notes addresses the likelihood that investors will receive full and timely payments of interest, pursuant to the transaction's governing documents, as well as the stated balance of principal by the legal final maturity date.
Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are available on the Fitch Ratings web site at www.fitchratings.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.
Fitch Ratings, New York
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Major Parkhurst, 212-908-0206
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