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 (low) from “A”.

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 Floating-Rate Medium Term 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%. One of the underlying names experienced a credit event in December 2008, resulting in a loss of 0.99% to the Portfolio. The Portfolio would have to suffer further losses of 14.17% before losses from additional credit events would begin to flow through to Series D Noteholders.

The stability cushion available to the Transaction was 186 basis points (bps) 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 reference entities experiencing downgrades. On March 27, 2009, DBRS downgraded the Series D Notes to “A” after a number of the underlying obligors experienced severe credit deterioration in March. Five of the obligors were downgraded by two to four notches. Among the five downgraded obligors, two were downgraded to CC and are now assigned a very high probability of default.
Since the downgrade of the Series D Notes, a number of the Portfolio’s underlying obligors have experienced further credit deterioration of one to two rating notches. As a result, 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 (low) 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 have the following challenges:
(1) 62% 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 33% 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.