DBRS Downgrades Superior Trust Series D Floating-Rate Medium Term Notes

DBRS has today downgraded the Superior Trust Series D Floating-Rate Medium Term Notes (the Series D Notes) to “A” from AA. The downgrade does not affect the rating on the Series E Floating-Rate Medium Term Notes (the Series E Notes), which remains at AA.

The Series D Notes were issued by Superior Trust (the Trust) in exchange for Series B Floating-Rate Notes (the Series B Notes) in connection with a restructuring of the Series B Notes of the Trust that were previously outstanding. DBRS assigned a final rating of AA to the Series D Notes and the Series E Notes on December 19, 2008. The Series D Notes have a maturity date of September 28, 2016.

The Series D Notes are exposed to a collateralized debt obligation (CDO) transaction (the Transaction) that references a portfolio (the Portfolio) of 99 corporate obligors. The Transaction has an attachment point of 15.16%. If a 33% recovery is assumed for each credit event that occurs, this implies that 23 of the 99 referenced entities would have to experience a credit event during the life of the Transaction before losses would begin to flow through to Series D Noteholders.

The stability cushion available to the Transaction was 186 basis points (bps) using unnotched ratings when it was initially rated in December 2008. By the end of February 2009, the stability cushion available to the Transaction had decreased to 55 bps due to 21 of the 99 underlying obligors experiencing downgrades; the downgrades were not limited to any particular industry. Four of the obligors suffered downgrades of three to six notches.

Subsequent to the rating migrations mentioned above, 11 of the Portfolio’s underlying obligors have experienced credit deterioration in March. Five of the obligors suffered downgrades of two to four notches. Among the five downgraded obligors, two were downgraded to CC and are now assigned a very high probability of default.

As a result of credit deterioration in the Portfolio, the required subordination levels from the DBRS CDO Toolbox have increased due to certain reference entities being assigned a greater probability of default, and the previous rating assigned is no longer appropriate.

The revised rating of “A” assigned to the Series D Notes is sufficient based on the current level of subordination relative to the required level of subordination, which is mainly based on the ratings distribution, industry diversification and regional diversification of obligors included in the Portfolio, as well as the remaining term of the Series D Notes.

The Series D Notes has the following challenges:
(1) 61% of the Portfolio’s underlying ratings (notional-weighted) are currently under negative review or negative trend by at least one rating agency.

(2) The Portfolio has 30% exposure to non-investment grade obligors. Further ratings migration or defaults could negatively impact the rating of the Series D Notes.

The scheduled termination of the Transaction is September 28, 2016. DBRS is actively monitoring the credit quality of the Transaction and will provide further updates as necessary.

Notes:
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.