OLDWICK, N.J.--(BUSINESS WIRE)-- A.M. Best Co. has placed the debt ratings on various senior and mezzanine notes under review with negative implications.

The rating actions were taken on four specific multi-tranche collateralized debt (CDO) transactions co-issued by eight special purpose vehicles (SPV): I-Preferred Term Securities II, Ltd. and I-Preferred Term Securities II, Inc. (collectively, I-Preferred Term Securities II); ICONS, Ltd. and ICONS CDO Corp. (collectively, ICONS); InCaps Funding II, Ltd. and InCaps Funding II Corp. (collectively, InCaps Funding II); and Dekania CDO II, Ltd. and Dekania CDO II Inc. (collectively, Dekania CDO II ) (all known as issuers). (See below for a detailed listing of the ratings.)

The principal balance of the rated notes are collateralized by a pool of trust preferred securities, surplus notes and secondary market securities (collectively, the capital securities), primarily issued by small to medium-sized U.S. insurance entities. The capital securities are pledged as security to the notes. Interest paid by the U.S. insurance entities (the issuers of the capital securities) is the primary source of funds to pay operating expenses of the issuer and interest on the notes. Repayment of the note principal will be funded primarily from the redemption of the capital securities.

Major considerations in rating the notes included collateral default risk and associated recoveries, structural protection through the "waterfall" and other mechanisms, counterparty swaps protection, legal documentation and ongoing monitoring of the transaction.

Quantification of collateral default risk: The default risk attributed to the capital securities is based on A.M. Best's default statistics"”Best's Idealized Default Rates of Insurers. A.M. Best adjusted these default statistics to arrive at a stressed default, which aggregates default and interest-deferral probabilities. Based on the adjusted defaults of each specific transaction, conservative recovery assumptions that recognize the regulatory environment of the insurance industry, the "waterfall" as defined by the indenture and the results of stressed Monte Carlo simulations, A.M. Best determined that default risks on the various tranches of debt are within the default thresholds established for each rating category.


Structural protection: Among the mechanisms used to protect note holders are the following:

• a "waterfall" that determines the priority of interest and principal payments;
• note prepayments based on the senior and mezzanine coverage tests;
• in some of the transactions, a requirement that senior notes are amortized by an amount equal to the defaults and deferrals of the capital securities by using cash flows that would otherwise go to the income notes;
• the requirement in some of the transactions for the trustee to solicit and accept bids on the capital securities if the senior and mezzanine notes can be fully retired from the proceeds;
• in some of the transactions, beginning after a certain date, the diversion of a portion of the cash flow that would otherwise go to the income notes to the reduction of the senior and mezzanine notes;
• the option to prepay the capital securities after a five-year non-callable period;
• the option by the income note holders to purchase the capital securities after a specified date; and
• the option afforded to the income note holders to purchase defaulted or deferred capital securities.

The aggregate effect of these structural protection features is to reduce the overall default risk of the rated notes.

Counterparty swap: In several of the transactions, a swap transaction has been employed that aligns the cash flow of the assets to the requirements of the liabilities.

Ongoing monitoring: Ongoing monitoring will be maintained on the transactions until the notes mature or are otherwise retired. Regular qualitative and quantitative reports independently derived detailing the performance of the underlying collateral will be analyzed, supporting ratings will be monitored and regular contact will be maintained with the administrator to ensure that material changes are communicated and assessed.

The rating actions reflect concerns in a number of areas including (1) the growing number of "defaulted securities" and capital securities whose periodic interest payments are in a deferral mode in the various pools; (2) capital securities redemption activity occurring in the pools; (3) increased stress upon the various credit support/enhancement mechanisms; and (4) deterioration in the issuer credit ratings of individual insurance companies within the transaction pools.

The following debt ratings have been placed under review with negative implications:

I-Preferred Term Securities II"”

• "aaa" on $19.2 million floating rate class A-1 senior notes, due May 22, 2033
• "aaa" on $94.2 million floating rate class A-1-A senior notes, due May 22, 2033
• "aaa" on $68.0 million floating rate class A-2 senior notes, due May 22, 2033
• "aaa" on $7.0 million fixed/floating rate class A-3 senior notes, due May 22, 2033
• "a-" on $86.5 million floating rate class B-1 mezzanine notes, due May 22, 2033
• "a-" on $9.5 million fixed/floating rate class B-2 mezzanine notes, due May 22, 2033
• "a-" on $52.3 million fixed/floating rate class B-3 mezzanine notes, due May 22, 2033
• "bbb" on $26.2 million floating rate class C mezzanine notes, due May 22, 2033

ICONS"”

• "aaa" on $172.0 million class A senior notes, due 2034
• "aa" on $40.0 million class B senior notes, due 2034
• "a" on $6.7 million class C-1 deferrable mezzanine notes, due 2034
• "a" on $16.9 million class C-2 deferrable mezzanine notes, due 2034
• "a" on $5.1 million class C-3 deferrable mezzanine notes, due 2034
• "bbb" on $16.9 million class D deferrable mezzanine notes, due 2034

Dekania CDO II"”

• "aaa" on $197.9 million class A-1 first priority senior secured floating rate notes, due 2034
• "aaa" on $42.0 million class A-2 second priority senior secured floating ate notes, due 2034
• "aa" on $60.0 million class B third priority secured floating rate notes, due 2034
• "a-" on $21.2 million class C-1 fourth priority secured deferrable interest floating rate notes, due 2034
• "a-" on $30.0 million class C-2 fourth priority secured deferrable interest fixed/floating rate notes, due 2034
• "bbb" on $13.5 million class D-1 mezzanine secured deferrable interest floating rate notes, due 2034
• "bbb" on $4.5 million class D-2 mezzanine secured deferrable interest fixed/floating rate notes, due 2034

InCaps Funding II"”

• "aaa" on $66.2 million class A-1 floating rate senior notes, due 2034
• "aaa" on $50.5 million class A-2 floating rate senior notes, due 2034

For access to special reports, analytical methodologies and transactions relating to insurance-linked securities, please visit http://www3.ambest.com/sfc/.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.

A.M. Best Company

Analysts:

Emmanuel Modu, 908-439-2200, ext. 5356

emmanuel.modu@ambest.com

or

Elmo Chin, 908-439-2200, ext. 5227

elmo.chin@ambest.com

or

Public Relations:

Jim Peavy, 908-439-2200, ext. 5644

james.peavy@ambest.com

or

Rachelle Morrow, 908-439-2200, ext. 5378

rachelle.morrow@ambest.com

Source: A.M. Best Company