Approximately USD 367 million of debt securities affected
New York, November 24, 2010 -- The first sentence should read: "Moody's Investors Service
announced today that it has downgraded the ratings on the following notes
issued by ALESCO Preferred Funding IV, Ltd." Revised
release follows.
Moody's Investors Service announced today that it has downgraded the ratings
on the following notes issued by ALESCO Preferred Funding IV, Ltd.
U.S. $195,000,000 Class A-1 First
Priority Senior Secured Floating Rate Notes Due 2034 (current balance
of $168,975,664), Downgraded to Ba1 (sf);
previously on March 27, 2009 Downgraded to A3 (sf);
U.S. $63,000,000 Class A-2 Second
Priority Senior Secured Floating Rate Notes Due 2034, Downgraded
to B3 (sf); previously on March 27, 2009 Downgraded to Ba3
(sf);
U.S. $7,000,000 Class A-3 Second
Priority Senior Secured Fixed/Floating Rate Notes Due 2034, Downgraded
to B3 (sf); previously on March 27, 2009 Downgraded to Ba3
(sf);
U.S. $62,380,000 Class B-1 Mezzanine
Secured Floating Rate Notes Due 2034, Downgraded to C (sf);
previously on March 27, 2009 Downgraded to Ca (sf);
U.S. $51,620,000 Class B-2 Mezzanine
Secured Fixed/Floating Rate Notes Due 2034, Downgraded to C (sf);
previously on March 27, 2009 Downgraded to Ca (sf);
U.S. $3,000,000 Class B-3 Mezzanine
Secured Fixed/Floating Rate Notes Due 2034, Downgraded to C (sf);
previously on March 27, 2009 Downgraded to Ca (sf);
U.S. $5,000,000 Series I Combination
Notes Due 2034, Downgraded to C (sf); previously on April 28,
2009 Downgraded to Ca (sf);
U.S. $6,000,000 Series III Combination
Notes Due 2034, Downgraded to C (sf); previously on April 28,
2009 Downgraded to Ca (sf).
RATINGS RATIONALE
ALESCO Preferred Funding IV, Ltd., issued on May 18,
2004, is a collateral debt obligation backed by a portfolio of bank
trust preferred securities (the 'TRUP CDO'). On March 27,
2009, the last rating action date, Moody's downgraded six
classes of notes, which were the result of the application of revised
and updated key modeling assumptions, as well as the deterioration
in the credit quality of the transaction's underlying portfolio.
According to Moody's, the rating actions taken today are primarily
the result of an increase of the assumed defaulted amount in the underlying
portfolio. The assumed defaulted amount increased by $69.6M
since the last rating action. Cumulative assumed defaults now total
$149.6 million (39.8% of the current portfolio).
All the assumed defaulted assets are carried at zero recovery in our analysis.
The remaining assets in the portfolio have also shown a slight improvement,
as indicated by a WARF decrease to 1848, from 1979 as of the last
rating action date. This current WARF accounts for a credit estimate
stress, described in Moody's Rating Methodology "Updated Approach
to the Usage of Credit Estimates in Rated Transactions", October
2009. Currently, 49.8% of the portfolio is
estimated to be Ba1 or below, as determined both by using FDIC Q1-2010
financial data in conjunction with Moody's RiskCalc model to assess non-publicly
rated bank trust preferred securities and using financial data for insurance
companies from Moody's Insurance Team.
The par loss due to the increase in the assumed defaulted amount has resulted
in loss of overcollateralization for the tranches affected and an increase
of their expected losses since the last rating action. As of the
latest trustee report dated October 25, 2010, the Class A
Overcollateralization Ratio is 102.48% and the Class B Overcollateralization
Ratio is 68.26%,versus trustee reported levels from
the report dated February 28, 2009 of 134.17% and
92.65% respectively, which were used during the last
rating action on March 27, 2009.
The credit deterioration exhibited by these portfolios is a reflection
of the continued pressure in the banking sector as the number of bank
failures and interest deferrals of trust preferred securities issued by
banks has continued to increase. According to FDIC data,
a total of 314 banks have failed, to date, since the onset
of the current economic crisis in 2007, 265 of which have failed
since the date of the last rating action. In Moody's opinion,
the banking sector outlook continues to remain negative.
In our analysis we assume no prepayments. The weighted average
life of the portfolio is approximately 23.7 years.
The portfolio of this CDOs is mainly composed of trust preferred securities
issued by small to medium sized U.S. community banks that
are generally not publicly rated by Moody's. To evaluate their
credit quality, Moody's derives credit scores for these non-publicly
rated assets and evaluates the sensitivity of the rated transactions to
their volatility, as described in Moody's Rating Methodology "Updated
Approach to the Usage of Credit Estimates in Rated Transactions",
October 2009. The effect of the stress testing of these credit
scores varies between one and three notches, depending on the total
amount and relative size of these securities in the collateral pool.
Moody's evaluation of this transaction relies on financial data received
for a majority of bank obligors in the pool as of Q1-2010.
This financial data is used by Moody's to assess the credit quality of
bank obligors in the pool, relying on RiskCalc, an econometric
model developed by Moody's KMV. The results obtained from the RiskCalc
model have been translated to Moody's rating scale and adjusted by one
notch where necessary in order to compensate for the absence of credit
indicators such as rating reviews, outlooks and adjustments factoring
in cyclical developments in the economy.
Moody's performed a number of sensitivity analyses of the results to some
of the key factors driving the ratings.
The sensitivity of the model results to changes in the WARF (representing
a slight improvement and a slight deterioration of the credit quality
of the collateral pool) was examined. If WARF is increased by 250
points from the base case of 1848, the model results in an expected
loss that is one notch worse than the result of the base case for Class
A-1L. If the WARF is decreased by 200 points, expected
losses are one notch better than the base case results.
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
Moody's considers as well the structural protections in each transaction,
the risk of triggering an Event of Default, the recent deal performance
in the current market conditions, the legal environment, and
specific documentation features. All information available to rating
committees, including macroeconomic forecasts, input from
other Moody's analytical groups, market factors and judgments regarding
the nature and severity of credit stress on the transactions, may
influence the final rating decision.
The principal methodologies used in rating ALESCO Preferred Funding IV,
Ltd. were "Moody's Approach to Rating U.S. Bank Trust
Preferred Security CDOs" published in June 2010, "Using the Structured
Note Methodology to Rate CDO Combo-Notes" published in February
2004, and "Updated Approach to the Usage of Credit Estimates in
Rated Transactions" published in October 2009.
Due to the impact of revised and updated key assumptions referenced in
these rating methodologies, key model inputs used by Moody's in
its analysis, such as par, weighted average rating factor,
Moody's Asset Correlation, and weighted average recovery rate,
may be different from the trustee's reported numbers. In particular,
rating assumptions for all publicly rated corporate credits in the underlying
portfolio have been adjusted for "Review for Possible Downgrade",
"Review for Possible Upgrade", or "Negative Outlook".
The transaction's portfolio was modeled, according to our rating
approach, using CDOROM v.2.6 to develop the loss distribution
from which the Moody's Asset Correlation parameter was obtained.
This parameter was then used as an input in a cash flow model using CDOEdge.
CDOROM v.2.6 is available on moodys.com under Products
and Solutions -- Analytical models, upon return of
a signed free license agreement.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and confidential
and proprietary Moody's Analytics' information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our web site, at www.moodys.com/SFQuickCheck.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Sange Lama
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Rodrigo Araya
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
Correction to Text, Nov 23, 2010 Release: Moody's takes rating action on TRUP CDO notes issued by ALESCO Preferred Funding IV, Ltd.
