Jan 22 -
-- We have reviewed Cavendish Square Funding 2, based on recent transaction developments observed in the November 2012 trustee report, and we have performed our credit and cash flow analysis based on the application of our relevant criteria.
-- Following our review, we have affirmed our ratings on all classes of notes.
-- Cavendish Square Funding 2 is a CDO transaction backed by pools of structured finance assets.
Standard & Poor’s Ratings Services today affirmed its credit ratings on Cavendish Square Funding 2 Ltd.’s class RCF, A1-N, A2, B, and C notes (see list below).
Today’s rating actions follow our assessment of the transaction’s performance, based on recent transaction developments observed in the trustee report (dated Nov. 30, 2012), and our credit and cash flow analysis based on the application of our relevant criteria.
Since our previous review of this transaction on April 26, 2012, we have observed higher defaults in the pool, which has resulted in a marginal decrease in credit enhancement for all classes of notes (see “Transaction Update: Cavendish Square Funding 2 Ltd.”). All par coverage tests are in compliance with the required triggers under the transaction documents and are passing at higher levels than at our previous review.
Assets rated in the ‘CCC’ category have also reduced, which among other things (like the shorter time to maturity), has reduced the scenario default rates (SDR) at each rating level compared with our previous review (see “Credit Rating Model: CDO Evaluator 6.0,” published on March 19, 2012).
We have subjected the capital structure to our cash flow analysis, based on the methodology and assumptions outlined in our 2012 and 2009 collateralized debt obligation (CDO) criteria, to determine the break-even default rate (BDR) at each rating level (see “Global CDOs Of Pooled Structured Finance Assets: Methodology And Assumptions,” published on Feb. 21, 2012, and “Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs,” published on Sept. 17, 2009).
We used the reported portfolio balance that we considered to be performing, the principal cash balance (if any), the weighted-average spread, and the weighted-average recovery rates that we considered to be appropriate. We incorporated various cash flow stress scenarios, using various default patterns, in conjunction with different interest rate stress scenarios.
We used CDO Evaluator 6.0.1 to generate SDRs at each rating level to help assess the credit risk of the collateral pool. We then compared these SDRs with their respective BDRs.
Taking into account the observations outlined above and the results of our cash flow analysis, we consider that the levels of credit enhancement available to all classes of notes are commensurate with their current ratings. We have therefore affirmed our ratings on the class RCF, A1-N, A2, B, and C notes.
The largest obligor test and largest industry test are two supplemental stress tests that we introduced in our 2012 CDO criteria. These tests address event and model risk that might be present in the transaction and assess whether a CDO tranche has sufficient credit enhancement (not including excess spread) to withstand specified combinations of underlying asset defaults in addition to our cash flow analysis. All classes of notes pass these supplemental tests at their current rating levels.
We have analyzed counterparty risk by applying our 2012 counterparty criteria (see “Counterparty Risk Framework Methodology And Assumptions,” published on Nov. 29, 2012). The counterparty agreements comply with the requirements outlined in the criteria.
Cavendish Square Funding 2 is a CDO transaction backed by pools of structured finance assets, which closed August 2007. This quarterly interest paying transaction is still in its reinvestment period, which is scheduled to end in September 2013. Our ratings on the class RCF, A1-N, and A2 notes address timely payment of interest and ultimate payment of principal, and our ratings on the class B and C notes address ultimate payment of interest and principal.
-- S&P Announcement: CDO Evaluator Version 6.0.1 Released, Aug. 7, 2012
-- Transaction Update: Cavendish Square Funding 2 Ltd., April 26, 2012
-- Credit Rating Model: CDO Evaluator 6.0, March 19, 2012
-- European Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, March 14, 2012
-- Global Structured Finance Scenario And Sensitivity Analysis: The Effects Of The Top Five Macroeconomic Factors, Nov. 4, 2011
Cavendish Square Funding 2 Ltd.
EUR402.45 Million Secured Floating-Rate Notes Revolving Credit Facility And Fixed-Rate Notes
RCF A (sf)
A1-N A (sf)
A2 BBB+ (sf)
B BBB+ (sf)
C BBB (sf)