Nova CDO 2001, a collateralized debt obligation managed by Phoenix Investment Partners, with Antares Capital Corp. as the bank loan advisor, is suffering from deterioration in the credit quality of the underlying collateral and is out of compliance on all four of its overcollateralization (OC) tests, according to Mark Froeba, v.p., senior credit officer within the stuctured finance group at Moody's Investors Service. The deal, which closed in May of 2001, is predominantly a bond vehicle with a loan component.
A portfolio manager at Antares responsible for the transaction and Janalynne Gius, v.p. investor services for alternative financial products at Phoenix, did not return calls. The OC tests are designed to make sure there is significant collateral to cover the notes, Froeba said. In Nova, when some assets come to be rated triple-C, they are no longer rated at par due to a haircut test, he explained. If the deal fails the OC tests because of a loss of value, the interest proceeds that would have been paid to the equity holders are then diverted to paying back the senior notes until there is enough collateral to cover the notes. As a result, the rating agency has placed two classes of notes issued by Nova under review for downgrade.