Various Ratings Actions Taken In Cash Flow CBO Transaction WISE 2006-1 Following Review

Stocks and Financial Services Press Releases Thursday June 29, 2017 17:10
LONDON--29 Jun--S&P Global Ratings

LONDON (S&P Global Ratings) June 29, 2017--S&P Global Ratings today lowered to 'BB- (sf)' from 'BB+ (sf)' and to 'B- (sf)' from 'B+ (sf)' its credit ratings on WISE 2006-1 PLC's class A and B notes, respectively.

At the same times, we have affirmed our 'CCC (sf)' rating on the class C notes (see list below). We have reviewed the transaction using the performance report from April 2017 and by applying our corporate collateralized loan obligation (CLO) criteria and our project finance criteria (see "Related Criteria" below).

Since our previous review in February 2015 (see "Q4 2014 Portfolio Benchmarks And SROC For 211 Synthetic CDO Tranches," published on Feb. 26, 2015), we have observed the following changes: The available credit enhancement has marginally increased for the class A and B notes.

The class C notes (the most junior class of notes) continue to have zero credit enhancement. The portfolio is now more concentrated, with fewer than 30 assets left in the portfolio. This has resulted in a lower ratings cap under our application of the largest obligor default test.

There were no credit events tracked in the first quarter of 2017. The weighted-average rating on the portfolio continues to be 'BBB+'. The weighted-average recovery rate (WARR) calculated on the portfolio has also marginally increased to 49% from 46%.

From the trustee report, we note that the SROC (synthetic rated overcollateralization) levels for the class A and B notes are below 100%. An SROC level of 100% indicates that there is exactly sufficient credit enhancement to maintain the rating on the tranche. If SROC falls below 100%, then the tranche can no longer support the rating.

We determined the scenario default rates (SDRs) by running the April 2017 portfolio data through our CDO Evaluator model, which is an integral part of our methodology for rating and monitoring CLO transactions.

Through a Monte Carlo simulation, the CDO Evaluator assesses a portfolio's credit quality, taking into consideration each asset's credit rating, size, and maturity, the estimated correlation between each pair of assets, and any bivariate emerging market risk. The portfolio's credit quality is presented in terms of a probability distribution for potential portfolio default rates.

From this probability distribution, the CDO Evaluator derives a set of SDRs, each of which identifies the minimum level of portfolio defaults each CLO tranche is expected to be able to withstand to support a specific rating level. We then applied the calculated WARR on the SDRs to determine the scenario loss rates (SLRs) to observe if the class A, B, and C notes can maintain their current rating levels. We perform our SLR analysis on a synthetic collateralized bond obligation (CBO) to model the range of possible losses in the reference portfolio.

We then compared the SLRs with the available credit enhancement to determine if there is sufficient credit enhancement available to sustain the current ratings on the notes.

We determined that all classes of notes now pass at lower rating levels. We have therefore lowered our ratings on the class A and the B notes and affirmed our 'CCC' rating on the class C notes. We also applied supplemental tests outlined in our corporate CLO criteria (the largest obligor default test, among others).

These supplemental tests are additional quantitative elements in our analysis that are separate and distinct from the Monte Carlo default simulations we run in the CDO Evaluator and the cash flow analysis generated for each transaction.

We consider that adding these tests to our simulation model enhances our overall analysis because the tests are intended to address both event and model risks that may be present in rated transactions.

Our ratings on the class A and B notes are constrained by the application of the largest obligor default test. The par losses, from a largest obligor default perspective, have been detrimental to all classes of notes. We have therefore lowered our ratings on the class A and B notes by two notches and affirmed our rating on class C notes. With no credit enhancement available for the class C notes, it does not pass our SLR and supplemental test analysis at the current rating level.

Overall, the assets' performance been positive, with no defaults, although the expected losses in the pool have increased in the credit model due to the increased pool concentration. WISE 2006-1 is a synthetic CBO transaction backed by a pool of project finance bonds and utility bonds.

The purpose of the transaction, which is structured as a partially funded synthetic CBO transaction, is to transfer the credit risk associated with a pool of £1.5 billion wrapped infrastructure bonds (the reference portfolio).


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