DBRS Upgrades White Knight Investment Trust Floating Rate Notes to A (high) (sf) from BBB (high) (sf)

DBRS Limited (DBRS) has today upgraded the Floating Rate Notes (the Notes) issued by White Knight Investment Trust (WKIT) to A (high) (sf) from BBB (high).

WKIT was created as part of a restructuring of Skeena Capital Trust in December 2007. WKIT is a bankruptcy-remote special-purpose entity whose business is strictly limited to entering into and administering WKIT’s asset interests (the Asset Interests), which consist of tranche investments in six underlying credit default swaps (CDSs) (each, a Transaction and, collectively, the Transactions).

As part of the restructuring, a significant amount of leverage was employed for each of the synthetic collateralized debt obligation (CDO) tranches; however, the concept of margin calls to increase the funded amount for negative marked-to-market movements on the value of each underlying Asset Interest was removed for all transactions. As a result, the rating of the Notes is primarily based on the credit quality of the Asset Interests.

DBRS rates the Notes at the level equivalent to the underlying Transaction with the lowest credit assessment (the Lowest Transaction). The Lowest Transaction has been upgraded to A (high) from BBB (high) today and, as a result, the rating on the Notes has been upgraded to A (high) (sf) from BBB (high) (sf). A summary of the six underlying Transactions is given below.

-- Transaction 1: Funded Amount of $110 million, Notional Amount of $4.177 billion and Credit Assessment of AAA
-- Transaction 2: Funded Amount of $110 million, Notional Amount of $4.190 billion and Credit Assessment of AAA
-- Transaction 3: Funded Amount of $110 million, Notional Amount of $4.328 billion and Credit Assessment of AAA
-- Transaction 4: Funded Amount of $120 million, Notional Amount of $4.583 billion and Credit Assessment of AAA
-- Transaction 5: Funded Amount of $60 million, Notional Amount of $1.397 billion and Credit Assessment of AAA
-- Transaction 6: Funded Amount of $40 million, Notional Amount of $1.500 billion and Credit Assessment of A (high)

Since the last rating action in May 2014, there has been continued improvement in the credit quality of the portfolios referenced by the Transactions. In addition, the Transactions benefited from another year of time decay, a concept whereby a structured credit grows less risky as it nears its maturity.

The rating of A (high) (sf) on the Notes is based on the current level of subordination in the Lowest Transaction relative to the expected level of subordination for that credit assessment level, which is mainly based on the ratings distribution and industry diversification of the obligors referenced in the Lowest Transaction’s portfolio as well as on the remaining term of the Lowest Transaction.

WKIT has the following challenges:
-- The Lowest Transaction has 24% exposure to non-investment grade obligors (excluding already defaulted entities). Rating downgrades or defaults on the underlying reference entities in the Lowest Transaction could negatively affect the credit assessment of the Lowest Transaction (and, accordingly, the rating on the Notes).
-- Of the Lowest Transaction portfolio’s underlying ratings (notional-weighted), 14% are currently on negative watch or negative trend by at least one Nationally Recognized Statistical Rating Organization.
-- Because of the significant amount of leverage employed in each underlying Transaction, the collateral-commingling arrangement at final maturity subjects noteholders to the risk that an incurred loss experienced under any of the six underlying CDO tranches will result in severe losses to the Notes.

The scheduled maturity of the Notes is December 20, 2016. DBRS actively monitors the credit quality of WKIT and will provide further updates as necessary.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating CLOs and CDOs of Large Corporate Credit (April 2015) and Canadian Surveillance Methodology for CDOs of Large Corporate Credit (July 2014), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at www.dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.