Bangkok--29 Aug--Standard & Poor's
OVERVIEW
- We have raised our ratings on RMF Euro CDO III's class II and III notes following our performance review.
- At the same time, we have affirmed our ratings on the class I, IV, and V notes.
- RMF Euro CDO III is a cash flow CLO transaction that closed in August 2005 and securitizes loans and bonds to primarily speculative-grade corporate firms.
LONDON (Standard & Poor's) Aug. 29, 2012--Standard & Poor's Ratings Services today raised its credit ratings on RMF Euro CDO III PLC's class II, and III notes. At the same time, we have affirmed our ratings on the class I, IV, and V notes (see list below).
Today's rating actions follow our assessment of the transaction's performance since our previous review on Sept. 5, 2011, taking into account recent developments (see "Transaction Update: RMF Euro CDO III PLC"). We have used data from the trustee report dated July 9, 2012, and our cash flow analysis. We have applied our 2012 counterparty criteria and our 2009 cash flow criteria (see "Counterparty Risk Framework Methodology And Assumptions," published on May 31, 2012, and "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published on Sept. 17, 2009).
Based on our analysis, the portfolio's performance has deteriorated. This has been primarily due to the increase to 9.68% from 4.69% in the proportion of assets that we consider to be rated in the 'CCC' category ('CCC+', 'CCC', or 'CCC-'). Of the portfolio, 0.34% now comprises defaulted assets (rated 'CC', 'SD' [selective default], or 'D').
Our analysis indicates that the level of available credit enhancement for the class I notes has marginally increased due to their deleveraging. At the same time, the level of available credit enhancement for the class II to V notes has decreased. In addition, the weighted-average spread earned on the collateral portfolio has increased and the portfolio's weighted-average maturity has decreased. However, the portfolio's negative credit migration has caused our scenario default rate to increase in the transaction.
We have subjected the capital structure to a cash flow analysis, to determine the break-even default rate for each rated class of notes. In our analysis, we have used the reported portfolio balance, weighted-average spread, and weighted-average recovery rates that we consider to be appropriate. We have incorporated various cash flow stress scenarios, using alternative default patterns, levels, and timings for each liability rating category ('AAA', 'AA', and 'BBB'), in conjunction with different interest rate stress scenarios.
At closing, RMF Euro CDO III entered into swap obligations to mitigate currency risks, which do not fully reflect our 2012 counterparty criteria. As a result, our criteria limit the maximum potential rating on the notes at the issuer credit rating on the counterparty plus one notch. Accordingly, we have conducted our analysis taking into account the transaction's exposure to the swap counterparty and the potential effects if the swap did not perform. Under this scenario, the cash flow stresses cannot support a higher rating than 'AA+ (sf)' on the class I notes. We have therefore affirmed our 'AA+ (sf)' rating on the class I notes.
We have raised our ratings on the class II and III notes because, although the level of credit enhancement has slightly decreased, the increase in the spread and the decrease in the weighted-average life support a higher rating on these classes of notes.
We have affirmed our ratings on the class IV and V notes because, although the level of credit enhancement available to these classes of notes decreased, it is still commensurate with the ratings that we assigned in our last review.
We have applied our largest obligor default test--a supplemental stress test in our 2009 cash flow criteria. We have also applied our largest industry default test (another supplemental stress test). The application of our supplemental tests did not constrain our ratings on any of the notes.
RMF Euro CDO III is a cash flow collateralized loan obligation (CLO) transaction that closed in August 2005 and securitizes loans and bonds to primarily speculative-grade corporate firms.