Second review on Athilon rating

CDPCs write protection on senior credit default swaps and tranches of securitisations in exchange for a premium. The review for downgrade relates to two exposures to collateralised debt obligations (CDOs) of asset-backed securities (ABS). The ABS market has been in the doldrums since August last year, when the US subprime residential mortgage crisis hit the market, with a knock-on effect on the credit quality of CDOs of ABS.

"As a result of the increased credit risk, Athilon's capital may be insufficient to limit expected losses to levels commensurate with its current ratings," said Moody's in its report.

Athilon Asset Acceptance, a wholly owned subsidiary of Athilon Capital, has also had its counterparty rating cut. Moody's notes that the remainder of Athilon Asset Acceptance's portfolio is made up of tranches with corporate and sovereign exposures. The CDPC specialises in senior tranches of corporate CDOs.

The move comes after Fitch placed both companies' counterparty ratings (issuer default rating in Fitch's terminology) on rating watch negative on July 2 after concerns over the same two investments. In a release on that day, Fitch noted that the smaller of the two transactions had suffered a downgrade to CCC from AAA on its most senior tranche.

The agency's concerns relate to the need to hold more capital against the exposures that suffered severe rating migration, and the companies' ability to hold extra capital against the relevant exposures.

"It is important to note that we rate five CDPCs and this is the only one with structured finance exposure," said John Olert, global head of Fitch's structured credit group in New York. "The rating watch relates to concerns on the impact that these exposures could have."

Patrick Gonzalez, chief executive officer of Athilon in New York, insisted in an emailed statement regarding the Fitch downgrade that both companies continue to pass all tests required by Athilon's operating guidelines and capital mode, which were reviewed by Fitch in connection with the AAA counterparty ratings.

"Athilon will continue to work with Fitch Ratings to review and remedy its decision to place Athilon's ratings on rating watch negative," said Gonzalez. "Fitch and Athilon have employed significantly different methodologies in analysing the two transactions referenced in its release."

See also: CDPCs under pressure