DBRS Downgrades Revelstoke CDO I Class A-1 Notes

DBRS has today downgraded the rating of the Class A-1 Senior Variable Rate Secured Notes due 2020 (the Class A-1 Notes) issued by Revelstoke CDO I Limited (Revelstoke or the Transaction). The rating on the Class A-1 Notes has been downgraded to CCC (low) from BBB and has been removed from Under Review with Negative Implications, where it was placed on January 5, 2009. The ratings on the Class A-2 Senior Variable Rate Secured Notes due 2026 (the Class A-2 Notes) and the Class A-3 Senior Variable Rate Secured Notes due 2033 (the Class A-3 Notes) have been confirmed at CC and C, respectively.

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 (collectively, the Notes) had approximate initial enhancement levels of 40%, 20% and 9%, respectively.

As part of its analysis of residential mortgage-backed securities (RMBS) held by Revelstoke, DBRS 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.

In the past several months, performance has continued to deterioriate significantly for many of the RMBS held by the Transaction. As a result, DBRS expects that a higher percentage of the underlying RMBS will default, which has negatively affected the credit quality of the Class A-1 Notes. Of the current Revelstoke RMBS assets, 50% were assigned an assessment of C (weighted by principal amount). In addition, many of the underlying CDOs are expected to default, with little recovery value.

The Class A-1 Notes, Class A-2 Notes and Class A-3 Notes are now rated CCC (low), CC and C, respectively. DBRS expects that holders of both the Class A-2 Notes and Class A-3 Notes will likely not receive any return of initial principal over the term of the Transaction. However, they will continue to receive interest payments on an ongoing basis; the interest payments on the Class A-2 Notes and Class A-3 Notes rank senior to the principal payments on the Class A-1 Notes in the Transaction’s priority of payments. DBRS expects that holders of the Class A-1 Notes will likely experience a first-dollar loss and not have their full initial investment returned.

The Transaction issued approximately $494 million of 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, which 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, Canadian Imperial Bank of Commerce (CIBC or the Hedge Counterparty) has the option to terminate the principal portion of the Class A-2 Notes hedge agreement swapping USD for CAD provided the termination will not result in an immediate downgrade of the Class A-2 Notes. Consistent with DBRS’s view that the Class A-2 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-2 Notes would likely be acceptable. Eliminating the principal portion of the Class A-2 Notes 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.

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.