DBRS Downgrades Superior Trust Series E Floating-Rate Medium Term Notes to BBB (low)

DBRS has today downgraded the Superior Trust (the Trust) Series E Floating-Rate Medium Term Notes (the Series E Notes) to BBB (low) from A (low). The rating has been removed from Under Review with Negative Implications, where it was placed on October 23, 2009.

The Series E 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 E Notes have a maturity date of September 28, 2016.

On October 23, 2009, DBRS placed the rating on the Series E Notes Under Review with Negative Implications after Merrill Lynch Canada Inc. (MLC), as Financial Services Agent of the Trust, advised DBRS that it had proposed a restructuring that would improve the credit quality of the reference portfolio in the credit default swap that backs the Series E Notes (the Series E CDS) by replacing 24% of the current reference entities in the Series E CDS (the Revised Portfolio). MLC advised DBRS that on October 23, 2009, the Trust provided all Series E Noteholders with the option to amend the portfolio of the Series E CDS to the Revised Portfolio or retain their existing Series E Notes with no changes to the Series E CDS (the Proposed Restructuring).

On that date, DBRS issued a press release indicating that if the Proposed Restructuring was not accepted by all Series E Noteholders and no other restructuring options were agreed to by holders of Series E Notes, the rating on the Series E Notes would likely be downgraded from A (low) to BBB (low). The Proposed Restructuring has now been completed, and DBRS has been advised by MLC that not all Series E Noteholders elected to amend the portfolio of the Series E CDS to the Revised Portfolio. As a result, a new series of notes has been issued by the Trust to those Series E Noteholders that elected to amend the portfolio of the Series E CDS to the Revised Portfolio (the Series G Floating-Rate Medium Term Notes) in exchange for such Series E Noteholders’ Series E Notes.

Since no material credit deterioration has occurred to the reference portfolio of the Series E CDS since the rating of the Series E Notes was placed Under Review with Negative Implications, the rating on the Series E Notes has been downgraded from A (low) to BBB (low).

DBRS is actively monitoring the credit quality of the Series E Notes and will provide further updates as necessary. Further details on the credit deterioration resulting in the downgrade of the Series E Notes to BBB (low) are provided below.

The Series E Notes are exposed to a collateralized debt obligation (CDO) transaction (the Transaction), represented by the Series E CDS, that references a portfolio of 99 corporate obligors (the Portfolio). The Transaction has an attachment point of 10.50% and a detachment point of 14.50%. One credit event occurred in August 2009, resulting in 0.37% of losses to the Series E CDS reference portfolio. Another credit event occurred in November 2009 and its recovery rate has not been finalized.

On July 23, 2009, DBRS downgraded the Series E Notes to A (low) because of the severe credit deterioration of a number of the Portfolio’s underlying obligors during the first half of 2009. Among the downgrades, CIT Group Inc. was downgraded from BBB (high) to CC over multiple rating actions by DBRS; this rapid credit deterioration contributed to the downgrade of the Series E Notes at that time.

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 of BBB (low) assigned to the Series E 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 referenced by the Portfolio, as well as on the remaining term of the Series E Notes.

The Series E Notes have the following challenges:

(1) 59% 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 16% exposure to non-investment-grade obligors. Further ratings migration or defaults could negatively affect the rating of the Series E Notes.

The scheduled termination of the Transaction is September 20, 2016.

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.