OREANDA-NEWS. Fitch Ratings has upgraded Cheyne Credit Opportunity 1B.V., as follows:

Class II (ISIN XS0243225215): affirmed at 'AAAsf'; Outlook Stable
Class III (ISIN XS0243225488): upgraded to 'AAsf' from 'A+sf'; Outlook Stable
Class IV (ISIN XS0243225728): affirmed at 'BBBsf'; Outlook Stable
Class V (ISIN XS0243226296): affirmed at 'BBsf'; Outlook Stable

Cheyne CDO I is a EUR1bn cash arbitrage CDO collateralised by senior secured, senior unsecured, mezzanine, and second lien leveraged loans as well as high yield obligations, and managed by Cheyne Capital Management Limited.

KEY RATING DRIVERS
The upgrade reflects the portfolio's stable performance and the transaction's significant deleveraging over the past year. Since last review, the Class I notes have paid in full and the Class II notes have paid down to EUR18m or 45.2% of their original balance. Credit enhancement (CE) for the Class II notes has risen to 91.5% from 68.7% and for the Class III notes to 72.7% from 44.1%. As of the December 2014 investor report, the deal has accumulated enough cash (EUR19.7m) to pay the Class II notes in full on the next payment date in February 2015.

As the transaction has amortised the deal has become more concentrated. The 10 largest issuers account for 92.6% of the outstanding balance and the largest issuer accounts for 12.3%. In total there are only 29 assets in the pool from 13 issuers as opposed to 59 assets from 33 issuers last year.

Despite the high CE for the Class IV (44.5%) and V notes (30.4%), these tranches have been affirmed because they are sensitive to large obligor defaults.

There are two defaulted assets in the portfolio, accounting for 17.3% of the total investment amount, an increase from the last review when 5.7% of the transaction was defaulted. The weighted average rating factor as reported in the December investor report has also increased to 30.1 from 28.9 at last review.

The senior par value and interest coverage tests are passing with substantial cushions. The junior tests are also passing but with smaller cushions. The par value coverage test on the Class V notes currently has a cushion of 23.4%. If two large issuers were to default the coverage test would breach and divert interest to pay down the senior notes.

RATING SENSITIVITIES
In its rating sensitivity analysis, Fitch found that a 25% increase of the default probability would result in downgrades of one notch for the Class IV notes and two notches for the Class V notes.

A 25% reduction of the recovery rate would result in a downgrade of one notch for the class IV notes and one category downgrade for the Class V notes. All other note classes would be unaffected.