David L. Babson & Company, struggling with the high defaults in its 1999 high-yield collateralized debt obligation Perseus CDO, has taken another downgrade hit from Moody's Investors Service. The class B-1 and B-2 notes on the $565 million vehicle, have been downgraded from B1 to B3, with the ratings on watchlist for another possible downgrade. The vehicle is approximately 70% bonds and 30% loans, and though the defaults have been mostly bonds, both asset classes have been affected, said Rodanthy Tzani, an analyst in the structured finance group at Moody's. Managers at David L. Babson, a Massachusetts Mutual Life Insurance Company subsidiary, did not return calls.
The transaction is currently out of compliance with the required average debt rating and is violating all of the principal coverage tests, said Tzani. The loss of par and deterioration in the credit quality of the underlying assets has increased the credit risk of the class B notes to the point where the current credit rating action is warranted. The class B-1 floating rate senior notes are $6.5 million and the class B-2 fixed rate senior subordinated notes due 2011 are $49.5 million.
The notes were originally rated Baa2, but both were downgraded in March to Ba2, then in June to B1, said Tzani. The triple-A notes have not been downgraded as they are wrapped, she said. The class A debt is $430.5 million and the equity piece is $54.8 million. The managers have been trying to address the issue through buying higher-quality names, said Tzani. The names they do not expect to recover they sell, she added. Investors in the CDO can attempt to sell the notes in the secondary market, she noted, but that is not a very liquid market.