Last weekFitch Ratings downgraded two tranches of the liabilities of Pilgrim Investments' collateralized loan obligation, Pilgrim CLO 1999-1, removing them from credit watch negative. A $60 million class B tranche has been downgraded from BBB+ to BBB- and a $10 million class C tranche from BB+ to BB-. Michele Zacharias, analyst at Fitch, said the current downgrade reflects increased levels of defaults and deteriorating credit quality of underlying assets.
Given the current quality of the portfolio, Fitch believes the credit risk to noteholders is no longer consistent with initial ratings, said Zacharias. "During the last review we noticed some deterioration in the weighted average rating test, " added Zacharias, explaining that the deal now has 92.5% collateral in senior secured bank loans while it's supposed to be 95%. In addition, she said 18% of the assets are trading at or below 85, 13% are trading at or below 80, and 7.54% are trading at or below 70. "We are especially concerned about these as they are demonstrating distress," she said, referring to those assets trading at or below 70.Elliot Rosen, portfolio manager at Pilgrim, declined to comment on how the fund will respond to the downgrade.