The following credit-linked notes issued by Argon Capital Public Limited Company (Argon Series 103) remain on Rating Watch Negative by Fitch:
--$115,0000,000 Series 103 limited recourse secured floating-rate credit-linked notes due 2053 'A'.
Fitch's renewal of the Rating Watch Negative status, which originally went into effect on April 18, 2008, reflects the increased likelihood of an early termination of the Argon Series 103 credit default swap (CDS) due to a distressed ratings downgrade credit event.
The Argon 103 CDS trades using a modified version of the International Swaps and Derivatives Association Inc.'s (ISDA) CDS on collateralized debt obligations (CDOs) swap confirmation, pursuant to which if the reference obligation experiences a credit event, a cash settlement process will begin to determine the final price of the affected asset. The reference obligation of Argon Series 103 is the class A-1 notes of Jupiter High-Grade CDO VI, LTD. (Jupiter VI).
Per the CDS confirm, a distressed ratings downgrade credit event can be called at the discretion of the protection buyer, Merrill Lynch International (MLI), if the ratings of Jupiter IV's class A-1 notes are downgraded to the pre-specified trigger levels identified in the Argon Series 103 transaction documents. The current ratings of the Jupiter VI class A-1 notes by the other rating agencies indicate an increased likelihood of a distressed ratings downgrade credit event occurring due to the ratings' proximity to these triggers. Upon the occurrence of a distressed ratings downgrade credit event, the Argon Series 103 CDS potentially exposes the noteholders to the market value risk of the Jupiter VI A-1 notes.
Argon Series 103 was initially placed on Rating Watch Negative on April 18 as a result of observed credit deterioration with respect to the collateral underlying Jupiter VI CDO, including subprime residential mortgage-backed securities (RMBS) and structured finance (SF) CDOs from the 2005, 2006 and 2007 vintages. Specifically, the probability of occurrence of a Super Senior Trigger Event, as defined in the transaction's governing documents, had increased materially based on Fitch's analysis. The Super Senior Trigger Event will be deemed to have occurred when aggregate portfolio losses in Jupiter VI exceed $975.7 million, or 65% of the initial $1.501 billion Jupiter VI portfolio. Aggregate portfolio losses are primarily a function of actual defaults and writedowns in the Jupiter VI portfolio as well as an assumed loss of 70% for all 'C' rated assets.
Resolution of the Rating Watch Negative status will incorporate any changes made to the transaction's structure, along with any additional portfolio migration. Currently, the risk of a Super Senior Trigger Event outweighs the risk of a distressed ratings downgrade credit event. However, the disparity between the other agencies' ratings of Jupiter's class A-1 notes indicates that the risk of a distressed ratings downgrade credit event may become more likely upon further actions by the applicable rating agencies.
Since Argon Series 103's closing date, approximately 85.2% of the underlying Jupiter VI portfolio has been downgraded, resulting in a portfolio comprised of approximately 34% investment grade assets and 66% non investment grade assets, including 53% assets rated 'CCC+' or below. This is in comparison to the November 2007 trustee report, at which time the portfolio was comprised of approximately 98% investment grade assets, 2% non investment assets, and 0% assets rated 'CCC+' or below. In addition to the observed credit deterioration, 28.7% of the Jupiter VI portfolio is currently on Rating Watch Negative.
Argon Series 103 is a leveraged super senior transaction referencing the Class A-1 notes of Jupiter High-Grade CDO VI, LTD. (Jupiter VI). At close, proceeds from the issuance of the $115 million Argon Series 103 notes were used to collateralize a credit default swap (CDS) between Argon and MLI. The rating of the notes addresses the likelihood that investors will receive full and timely payments of interest, pursuant to the transaction's governing documents, as well as the stated balance of principal by the legal final maturity date.
Jupiter VI is a high grade cashflow CDO, managed by Harding Advisory LLC. The portfolio is comprised primarily of subprime RMBS (52%), prime RMBS (7%), SF CDOs (23.5%), Alt-A mortgage loans (16.5%) and other diversified structured finance assets. U.S. Subprime RMBS of the 2006 and 2007 vintages account for approximately 6% and 45% of the portfolio, respectively.
Fitch will continue to monitor and review this transaction for future rating adjustments. Additional transaction information and historical data are available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Kevin Kendra, +1-212-908-0760
Major
Parkhurst, +1-212-908-0206
Sandro Scenga, +1-212-908-0278 (Media
Relations)
