Fitch Ratings said on Thursday that certain classes of notes issued across 43 CDOs backed all or in part by trust preferred securities issued by banks are on Rating Watch Negative.

Fitch also said it maintains the Rating Watch Negative status on certain classes of notes issued across 59 CDOs backed all or in part by trust preferred securities issued by banks or insurance companies. These classes were originally placed on Rating Watch Negative on May 21. In certain instances, the assignment of Rating Watch Negative and the maintenance of Rating Watch Negative affect different classes of the same CDO. In aggregate, 75 CDOs are affected by these rating actions.


Fitch’s rating actions are a result of continued credit pressures facing US banks and thrifts that finance trust preferreds through CDOs. Since the time of Fitch’s rating actions on May 21, Fitch has been notified of 17 bank trust preferred deferrals, totaling $463.5 million.


In addition, two banks previously in deferral are now deemed to be in default following regulatory seizure. Exposure to these two entities totals $591.3 million. Taking into account these additional defaults and deferrals, the aggregate amount of bank trust preferred defaults and deferrals observed by Fitch since September 2007 is $1.6 billion. This is in comparison to $258.5 million of bank trust preferred deferrals observed by Fitch over the seven years prior to September 2007.


U.S. banks that finance trust preferreds through CDOs face a number of negative, yet evolving, credit pressures. That said, Fitch believes it is premature to resolve the ratings of trust preferred CDOs currently on Rating Watch Negative, until such time as greater clarity exits with respect to the likelihood of deferral for those entities currently performing, the likelihood of default for those entities currently in deferral and the recovery rate prospects for those entities currently in default.

In identifying transactions and individual classes of notes to be placed on Rating Watch Negative, observed default and deferral activity was evaluated in the context of transaction-specific characteristics such as: available credit enhancement; prepayments and credit risk sales observed to date; obligor and geographic concentration; cash flow redirection mechanisms; and other structural enhancements.

 

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