On October 17, DBRS placed Apsley Trust under Credit Review Negative:
Approximately 7% ($1.8 billion by funding amount) of the CDO transactions in the Affected Trusts under the Montreal Accord consist of U.S. residential mortgage-backed securities (RMBS); however, 49% of these CDO transactions, or approximately $900 million, is held by Apsley, consisting of a $400 million transaction and a $500 million transaction, each fully funded (unleveraged).
The $400 million transaction synthetically references pools of 2005 and 2006 vintage U.S. non-prime residential mortgages. In accordance with our CDO rating methodology, DBRS has relied in the past on ratings from other major rating agencies as inputs to our model. Over the past several months, the reference entities for these U.S. RMBS transactions have been downgraded several times. Until now, all of the $1.8 billion CDO exposure to U.S. residential mortgages in the Affected Trusts met all of the minimum requirements for a AAA rating. Recently, however, one rating agency took the largest single-day rating action yet with respect to the U.S. non-prime residential mortgage market when it downgraded 2,187 U.S. RMBS bonds on October 11, 2007.
The result was that Apsley’s $400 million U.S. non-prime residential transaction experienced rating downgrades for almost half of the underlying credits, with an average cut of four rating levels for each security being downgraded. DBRS is currently analyzing the full effect of these rating actions and has subsequently placed Apsley Trust Under Review with Negative Implications. Based on the current ratings of the underlying bonds, DBRS believes that the $500 million transaction held by Apsley continues to be AAA but is monitoring it closely; additional downgrades or losses in the underlying bonds could result in significant downgrades in that transaction as well. DBRS is also reviewing the practice of using other rating agencies’ ratings in its ratings of structured finance transactions.
The remaining transactions in Apsley consist of $1.5 billion of leveraged super-senior transactions that reference corporate obligations. These transactions continue to be rated AAA from a probability of default perspective and continue to perform well. As of today, DBRS does not expect that these transactions will suffer losses and considers them to be strong from a credit and ratings migration perspective.
Today, the other shoe dropped:
DBRS has today downgraded the ratings of Apsley Trust (Apsley) Class A, Series A from R-1 (high) Under Review with Negative Implications to R-4 Under Review with Developing Implications; Class E, Series A from R-1 (high) Under Review with Negative Implications to R-4 Under Review with Developing Implications; Class FRN, Series A from AAA Under Review with Negative Implications to BB Under Review with Developing Implications.
…
At inception the portfolio of 80 reference obligations consisted of 50% BBB and 50% BBB (low) obligations as rated by DBRS and other Nationally Recognized Statistical Rating Organizations (NRSROs).
Recent negative rating actions taken by other rating agencies in the U.S. RMBS sector affected 36 of the 80 obligors referenced in the Transaction with an average rating cut of four rating levels. The cumulative effect of the downgrades to the credits referenced by the Transaction has been to push the attachment point to maintain a AAA rating through the current actual attachment point of the Transaction. The Transaction can therefore no longer maintain a AAA rating. In addition, due to observed slowdowns in prepayment speeds, DBRS has revised its term assumption in respect of the Transaction to seven years.
DBRS generally rates ABCP at the rating level of the lowest rated transaction funded by the ABCP. As the six other CDO transactions funded by Apsley remain AAA, the Transaction is now the lowest-rated transaction and its rating will therefore determine the highest-possible rating for Apsley overall.
Using the DBRS CDO Toolbox and applying the current ratings of the reference obligations and a revised assumption as to the term of the reference portfolio, a long-term rating of BB has been assigned to the Transaction by DBRS. The DBRS Long-Term to Short Term Mapping Table indicates that a rating of R-4 is appropriate for ABCP that is funding a BB rated transaction.
As mentioned above, in addition to the Transaction, there is another $500 million CDO transaction funded by Apsley that is 100% exposed to U.S. non-prime RMBS. This transaction has retained a sufficient stability cushion above the attachment point to maintain a AAA rating at this time. However, considering the speed at which the Transaction lost its stability cushion above AAA, future rating actions of similar size and severity by other NRSROs may cause the $500 million U.S. non-prime RMBS transaction to suffer a similar deterioration. As a result, DBRS continues to monitor this transaction closely. Additional downgrades or losses in the underlying bonds could result in a significant downgrade of this transaction. If a downgrade of this transaction below the BB range were to occur, further rating action in regard to Apsley would become necessary.
The five remaining CDO transactions representing $1.5 billion of funding by Apsley reference corporate obligations. These transactions continue to be rated AAA from a probability of default perspective and continue to perform well. DBRS does not expect that these transactions will suffer losses and considers them to be strong from a credit and ratings migration perspective.
Wow. That was fast!
Update, 2007-11-6: It is interesting to note from The Information Memorandum for Apsley Trust that:
Apsley Trust™ (the “Trust”) is a trust established under the laws of the Province of Ontario pursuant to a settlement deed made as of November 24, 2005 between Metcalfe & Mansfield Alternative Investments V Corp. in its capacity as trustee (collectively with its successors and assigns in such capacity, the “Issuer Trustee”; any reference to the Trust herein includes the Issuer Trustee acting in its fiduciary capacity as Issuer Trustee) and Metcalfe & Mansfield Capital Corporation, as settlor. The office of the Issuer Trustee for administering the activities of Apsley Trust™ is located at 141 Adelaide Street West, Suite 330, Toronto, Ontario M5H 3L5.
and from an August press release that:
Metcalfe & Mansfield Capital Corporation is a subsidiary of Quanto Financial Corporation, a private Canadian financial institution with offices in Montreal, Toronto and Calgary and representatives in Vancouver and Winnipeg. The principal shareholders of Quanto Financial Corporation are National Bank Financial, Deutsche Bank Canada and Redfern Equity Capital Partners.
The announcement of inauguration of Apsley Trust includes the paragraph:
Metcalfe & Mansfield Alternative Investments V Corp. is the Issuer Trustee of Apsley Trust. The Issuer Trustee is independent from the Issuers, the Financial Services Agent, the Administrative Agent, the Indenture Trustee, and other service providers to the Trust.
… but frankly, I don’t know what that means.
Update #2, 2007-11-6: The unnamed rating agency with the mass downgrade on October 11 was Moody’s. I briefly discussed the downgrade at the time.
Update #3, 2007-11-6: Accrued Interest has produced a simple example illustrating the volatility of CDO quality. More discussion has been referenced here.
[…] As with Canadian ABCP – I have nothing but sympathy for portfolio managers who held 5-10% in the sector; it looked pretty good to me too, and (with the exception of Apsley Trust) the credit quality was fine – it was simply the liquidity that suddenly disappeared. But too much of a good thing is simply too much. […]
[…] DBRS has now downgraded Planet Trust Series E notes, which join Apsley Trust in the doghouse: DBRS has today downgraded the Series E ratings of Planet Trust (Planet) to R-2 (high) from R-1 (high). The ratings remain Under Review with Developing Implications. […]