European RMBS—Clavel 2—Default by Agreement

Following nonpayment of the principal amount outstanding in full at the time of early redemption, DBRSM Morningstar recently downgraded the senior bonds of Spanish RPL RMBS Clavel Residential 2 DAC to D. In this commentary we explore what happened, why could it happen, and how likely it is that such principal defaults of highly rated senior notes occur in other European securitisation transactions.

“In our view, the default was the result of the specific circumstances and decisions made by a very small number of noteholders involved in the affected classes in this transaction. European securitisation noteholders are usually structurally protected from optional redemption below par. Getting all affected noteholders to agree to a principal loss, as was the case in Clavel 2, is much more difficult to achieve for widely held bonds”, says Christian Aufsatz, Head of European Structured Finance.