DBRS Downgrades Revelstoke CDO I Class A-1, Class A-2 and Class A-3 Notes

DBRS has today downgraded the ratings of three classes of notes issued by Revelstoke CDO I Limited (the Transaction). The Class A-1 Notes have been downgraded to BBB from AAA; the Class A-2 Notes have been downgraded to CC from B; and the Class A-3 Notes have been downgraded to C from CCC (collectively, the Notes). Also, the Class A-1 Notes have been placed Under Review with Negative Implications.

The Transaction is exposed to pools of U.S. non-prime residential mortgages, as well as other collateralized debt obligations (CDOs) backed by residential mortgages, among other assets. The Class A-1 Notes, Class A-2 Notes and Class A-3 Notes had approximate initial enhancement levels of 40%, 20% and 9%, respectively (actual enhancement changes as the total portfolio assets and liabilities decline due to losses and the paying down of certain classes of notes).

In accordance with its then-current CDO-rating methodology, DBRS relied in the past on residential mortgage-backed securities (RMBS) ratings from other major rating agencies as inputs to its CDO model. On February 15, 2008, DBRS announced a revision to its use of other agencies’ ratings, applying notching assumptions to 2006 and 2007 vintage U.S. RMBS under negative credit watch by other rating agencies. Notching was also applied to CDOs under negative credit watch by other agencies based on factors such as subordination, vintage concentration and underlying ratings. As a result of these revisions, the Class A-3 Notes were downgraded at that time. On July 18, 2008, DBRS downgraded the Class A-2 Notes and the Class A-3 Notes, applying more punitive loss expectations for the underlying CDOs held by the Transaction.

Since the July 2008 downgrade of the Class A-2 Notes and Class A-3 Notes, DBRS has strengthened its surveillance of CDOs of asset-backed securities (ABS). DBRS now reviews all of the underlying RMBS and provides a credit assessment based on each security’s pipeline of existing defaults, likely defaults and various delinquency statistics, as well as on cash flow modelling using different assumptions for prepayments and interest rates.

Over the past few months, delinquencies have increased significantly for many of the underlying RMBS held by the Transaction. As a result, DBRS expects that a higher percentage of the underlying RMBS will default, which has impacted the credit quality of the Notes issued by the Transaction.

The Class A-2 Notes and Class A-3 Notes have been downgraded to CC and C, respectively. DBRS now expects that holders of the Class A-3 Notes will likely not receive any return of initial principal over the term of the Transaction. DBRS expects that holders of the Class A-2 Notes will likely experience a first-dollar loss and not have their full initial investment returned.

The Transaction issued approximately $494 million of Class A-1, Class A-2 and Class A-3 Notes that were swapped to U.S. dollars at inception. There is a cross-currency U.S. dollar (USD)/Canadian dollar (CAD) swap in place to hedge the currency risk for these Notes that were issued in Canadian dollars, for both ongoing interest payments and for principal re-exchange at the maturity of the Notes. Pursuant to the Transaction documentation, CIBC (the Hedge Counterparty) has the option to terminate the principal portion of the Class A-3 hedge agreement swapping USD for CAD provided the termination will not result in an immediate downgrade of the Notes. Consistent with DBRS’s view that the Class A-3 Notes will likely not return any principal, any request by the Hedge Counterparty to terminate the principal portion of the cross-currency swap on the Class A-3 Notes would likely be acceptable. Eliminating the principal portion of the Class A-3 hedge would prevent the Transaction from being exposed to currency risk based on the expectation that there will not be any asset proceeds to exchange at maturity.

The Class A-1 Notes have been downgraded to BBB and placed Under Review with Negative Implications. Due to the failure of Overcollateralization and Interest Coverage tests, the Class A-1 Notes have been receiving return of principal on a monthly basis from paid off principal and excess spread from the portfolio’s underlying assets (about 16% of the total Class A-1 principal has been paid off). The probability of first-dollar loss has increased and caused a downgrade to the Class A-1 rating, but the Class A-1 Notes will continue to be paid down over time and are owed full principal and accrued interest before the Class A-2 Notes or Class A-3 Notes can receive any return of principal. DBRS will continue to actively monitor the performance of the Transaction’s underlying assets; continued poor performance may result in further rating action on the Class A-1 Notes.

DBRS will release further updates on www.dbrs.com as appropriate.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating Canadian Structured Credit Transactions and Canadian Structured Credit Surveillance, which can be found on our website under Methodologies.

This is a Structured Finance rating.