Meet Euromax IV.
Euromax IV is a €200m CDO backed by mezzanine residential and commercial mortgage-backed securities (RMBS and CMBS) . It appears to have been put together in 2003 by Hypo Real Estate.
It’s also one of the first Fitch-rated European CDOs to breach an event of default based on its overcollateralisation trigger, according to a statement published by the ratings agency late Tuesday.
Most CDOs have overcollateralisation tests that are triggered if the CDO’s collateralisation levels fall below its minimum requirements, as defined in the deal. For certain CDOs, if that happens it’s counted as an event of default — triggering a potential reshuffling of payments for investors.
From the statement:
Fitch Ratings-London-23 February 2010: Fitch Ratings comments today that Euromax IV MBS S.A. (Euromax IV) has breached its event of default (EOD) overcollateralisation (OC) ratio trigger, as reported in the February 2010 trustee report. Fitch believes this constitutes an EOD based on the transaction’s documentation.
Fitch expects Euromax IV to be the first of several Fitch-rated European structured finance (SF) collateralised debt obligations (CDOs) to experience an EOD related to the breach of an EOD OC ratio trigger. In most transactions, in an EOD, 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.
A total 14% of Fitch-rated European SF CDOs (11 transactions) have an EOD OC ratio trigger. In Fitch’s view, as the performance of underlying SF assets continues to deteriorate, more than half of the 11 transactions are likely to breach their EOD OC ratio triggers over the next year.
Fitch already rates all of Euromax IV’s notes at CCC, so this isn’t much of a surprise.
But it’s a CDO curio as it hints at remaining stress in the structured finance sphere.
Related links:
Assessing CDO event of default risk – The Deal
Weird waterfalls and the synthetic CDO stumper, part deux – FT Alphaville
`More bad news’ on banks CDO exposures to come, BofAML says – FT Alphaville
CPDOs, a structured finance post-mortem – FT Alphaville