Fitch Ratings is keeping an eye on the notes of Structured Enhanced Return Vehicle Trust, series 1999-4 (SERVES 1999-4), a synthetic collateralized loan obligation managed by Conseco Capital Management through Bank of America's balance sheet, after the BBB notes were downgraded. The $95 million BBB notes have been downgraded by Fitch to BBB- after SERVES 1999-4 suffered defaults and trading losses. "The default rate has been higher, the recovery rate lower and the excess spread is a little less than expected," said Fitch Director Michael Gerity.
Commenting on what Conseco needs to do going forward, he stated, "The fund does not necessarily have to do anything different now, they have already improved the portfolio. But they need to make up for losses." Gerity said the situation was "not drastic," but noted that Fitch will be keeping an eye on it. Officials at Conseco declined comment and the appropriate banker at B of A could not be reached.
The transaction enables investors to gain exposure to the economics of a reference loan portfolio via a total return swap between the Trust and B of A, the swap counterparty, on a leveraged basis. The swap counterparty references a $600 million high-yield loan portfolio. "Some of the SERVES deals have performed well, but we do expect some additional downgrades," Gerity noted. Meanwhile, "a couple of Sequils MINCS deals, a similar product promoted by J.P. Morgan, have been downgraded as well," he added.