NEW YORK - (Business Wire) Fitch Ratings has downgraded the following credit-linked notes issued by Argon Capital Public Limited Company (Argon Series 103):
--$115,0000,000 Series 103 limited recourse secured floating-rate credit-linked notes due 2053 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 103 credit default swap (CDS) due to a distressed ratings downgrade credit event, and is therefore linked to the ratings of the underlying reference obligation of Argon Series 103 [the class A-1 notes of Jupiter High-Grade CDO VI, LTD. (Jupiter VI)].
The Argon 103 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 the reference obligation experiences a credit event, a cash settlement process will begin to determine the final price of the affected asset.
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 Jupiter IV's class A-1 notes are downgraded by all of the applicable rating agencies to the pre-specified trigger levels identified in the Argon Series 103 transaction documents. The current ratings of the Jupiter VI class A-1 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 103 CDS potentially exposes the noteholders to the market value risk of the Jupiter VI class A-1 notes.
The current ratings of the Jupiter VI class A-1 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 103 was initially placed on Rating Watch Negative on April 18, 2008 as a result of observed credit deterioration with respect to the collateral underlying Jupiter VI CDO, including subprime residential mortgage-backed securities (RMBS) and structured finance (SF) CDOs 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. The Super Senior Trigger Event will be deemed to have occurred when aggregate portfolio losses in Jupiter VI exceed $975.7 million, or 65% of the initial $1.501 billion Jupiter VI portfolio. Aggregate portfolio losses are primarily a function of actual defaults and writedowns in the Jupiter VI portfolio as well as an assumed loss of 70% for all 'C' rated assets.
Since Argon Series 103's closing date, approximately 84% of the underlying Jupiter VI portfolio has been downgraded, resulting in a portfolio comprised of approximately 31% investment grade assets and 69% non investment grade assets, including 54% assets rated 'CCC+' or below. This is in comparison to the November 2007 trustee report, at which time the portfolio was comprised of approximately 98% investment grade assets, 2% non investment assets, and 0% assets rated 'CCC+' or below. In addition to the observed credit deterioration, 15% of the Jupiter VI portfolio is currently on Rating Watch Negative.
Argon Series 103 is a leveraged super senior transaction referencing the Class A-1 notes of Jupiter VI. At close, proceeds from the issuance of the $115 million Argon Series 103 notes were used to collateralize a credit default swap (CDS) between Argon and MLI. The rating of the 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
Derek Miller, 312-368-2076, Chicago
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