Euromax IV MBS S.A. (Euromax IV) triggered an event of default following a breach of its event of default overcollateralization ratio trigger. It’s likely to be the first of several European collateralized debt obligations to experience event of defaults triggered by a similar situation, Fitch Ratings said.
A total 14% of Fitch-rated European SF CDOs (11 transactions) have an event of default overcollateralization ratio trigger.
In Fitch's view, as the performance of underlying structured finance assets continue to deteriorate, more than half of the 11 deals are likely to breach their event of default overcollateralization ratio trigger over the next year.
In most transactions, in an event of default, the most senior noteholders could vote to enforce and redeem the notes via an enforcement waterfall where the more junior notes are cut off from any cash payments until the most senior notes are fully redeemed.
Fitch stated that the agency's current ratings of Euromax IV's notes, all of which are rated 'CCC' and below, already reflected the likelihood of an event of default overcollateralization ratio trigger breach.
Euromax IV's increasing 'B-' and below rated bucket, which is marked at market values or recovery estimates, contributed to the breach of the transaction's event of default overcollateralization ratio trigger.