DBRS Places Superior Trust Series D Notes Under Review with Negative Implications

DBRS has today placed the Series D Floating-Rate Medium Term Notes (the Series D Notes) issued by Superior Trust (the Trust) Under Review with Negative Implications.

Merrill Lynch Canada Inc., as Financial Services Agent of the Trust, has advised DBRS that it has proposed a restructuring that would improve the credit quality of the reference portfolio that currently backs the Series D Notes by replacing 20% of the current reference entities (the Proposed Restructuring).

If the Proposed Restructuring is accepted by all Series D Noteholders, the rating on the Series D Notes would likely be confirmed at A (low) as a result of the benefit from adding higher-quality reference entities to the Portfolio (as defined below). However, confirmation of the rating is dependent on whether the credit quality of the Portfolio is maintained during the Proposed Restructuring.

If the Proposed Restructuring is not accepted by all Series D Noteholders and no other restructuring options are agreed to, the rating on the Series D Notes would likely be downgraded from A (low) to BBB. The severity of the downgrade could change if the Portfolio experiences further credit deterioration during the interim period that the Proposed Restructuring (or any other restructuring proposal) is being considered by Series D Noteholders.

DBRS will closely monitor the status of the Series D Notes and will provide rating updates as required.

The Series D Notes were issued by the Trust in exchange for Series B Floating-Rate Notes (the Series B Notes) in connection with the restructuring of the Series B Notes that were previously outstanding. 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 of 99 corporate obligors (the Portfolio). The Transaction has an attachment point of 15.16%. One of the underlying reference entities (Tribune Company) experienced a credit event in December 2008, resulting in a loss of 0.99% to the Portfolio.

On July 23, 2009, DBRS downgraded the Series D Notes to A (low) because a number of the underlying obligors had experienced severe credit deterioration during the second quarter of 2009.

In September and October 2009, two Japanese consumer lenders (AIFUL Corporation (AIFUL) and Takefuji Corporation (Takefuji) experienced significant downgrades from other rating agencies. AIFUL suffered downgrades ranging from five to eight rating notches, and Takefuji suffered downgrades of four to five rating notches. These substantial rating cuts have negatively affected the Transaction. The Portfolio has 1.01% exposure to both AIFUL and Takefuji, which are now assigned a much higher probability of default. As a result, the required subordination levels from the DBRS CDO Toolbox have increased and the previous rating of A (low) is no longer appropriate.

The revised rating level of BBB that will likely be assigned to the Series D Notes absent a successful restructuring 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 referenced in the Portfolio, as well as on the remaining term of the Transaction.

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.