S&P: Various Rating Actions Taken In Cash Flow CLO Transaction Cadogan Square CLO Following Review
Today's rating actions follow our assessment of the transaction's performance by applying our relevant criteria and conducting our credit and cash flow analysis (see "Related Criteria"). In our analysis, we took into account recent developments and used the July 2016 payment date report.
Following our analysis, we have observed that the proportion of assets that weconsider to be rated in the 'CCC' category (i. e., rated 'CCC+', 'CCC', or 'CCC-') have decreased to 10.28% from 12.07% since our June 8, 2015 review (see "Various Rating Actions Taken In Cash Flow CLO Transaction Cadogan SquareCLO Following Review"). Defaults since our previous review have increased to 1.50% from 0.67%. We have also observed that the assets rated in the 'CCC' category and defaulted assets in this portfolio are relatively low compared tothe other collateralized loan obligation (CLO) 1.0 transactions we have recently reviewed.
Since our previous review, the pool's weighted-average life has decreased to 4.09 years from 4.71 years. The current weighted-average spread on the asset portfolio is 4.09%, down from 4.25%. With further deleveraging of the class A-1 and A-2 notes (which pay on a pro rata basis), the available credit enhancement for all classes of notes has increased. The par coverage tests forall tranches continue to remain within their documented triggers.
From the July 2016 report, we note that more than 20% of the assets in the portfolio have a legal final maturity that falls beyond the legal final maturity of the rated notes. The inclusion of such assets that mature on a date beyond the legal final maturity date of the liabilities requires that theCLO transaction sells these assets before this date. This exposes the transaction to the noncredit-related risk of loss of par and is particularly troublesome for corporate bonds and other types of instruments that return allor substantially all of the par balance at the asset's legal final maturity date. For these long-dated assets in the portfolio, we have applied certain haircuts (as outlined in paragraphs 181-183 of our CLO criteria "Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Aug. 8, 2016).
We have applied our structured finance ratings above the sovereign criteria (RAS criteria) to Cadogan Square, which is a multijurisdictional structured finance transaction that has tranches rated above certain sovereigns (e. g., Spain and Italy) (see "Ratings Above The Sovereign - Structured Finance: Methodology And Assumptions," published on Aug. 8, 2016). The RAS criteria superseded our criteria for nonsovereign ratings that exceed EMU sovereign ratings, which we applied at our previous review.
Based on the current portfolio, we concluded that there is no excess exposure to a lower-rated sovereign that needs to be stressed further in accordance with our RAS criteria.
In our cash flow analysis, under our updated CLO criteria, we have applied theupdated recovery rates (see tables 10 and 11 of the CLO criteria) on the collateral portfolio to determine the ratings for the class A to E notes.
We conducted our cash flow analysis to determine the break-even default rates (BDRs) for each rated class at each rating level. We incorporated various cashflow stress scenarios, using various default patterns in conjunction with different interest stress scenarios.
We have raised our ratings on the class C, D, and E notes as our credit and cash flow analysis suggests that these classes of notes can support higher ratings than those previously assigned.
Our credit and cash flow analysis suggests that the current 'AAA (sf)' ratingson the class A-1, A-2, and B notes can be maintained. We have therefore affirmed our 'AAA (sf)' ratings on these classes of notes.
At closing, Cadogan Square CLO entered into derivative agreements to mitigate currency risk. The documentation for the derivative contracts is not fully in line with our current counterparty criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on June 25, 2013). Therefore, in our cash flow analysis for scenarios above 'AA-', we have applied additional foreign exchange stresses.
Cadogan Square CLO is a cash flow CLO transaction that securitizes loans granted to primarily speculative-grade corporate firms. The transaction closedin December 2005 and is currently in its amortization phase.
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