MOODY'S DOWNGRADES THREE CLASSES OF NOTES ISSUED WITHIN ML CBO SERIES 1998-E&P-1 (ML CBO XIV (CAYMAN) LTD.), CITING CONTINUED DETERIORATION IN COLLATERAL POOL COVERAGE AND QUALITY
Moody's Investors Service has downgraded the ratings of the Class A-2 Floating Rate Second Senior Secured Notes, the Class A-3 Fixed Rate Second Senior Secured Notes and the Class B Floating Rate Third Senior Secured Notes issued by ML CBO XIV (Cayman) Ltd. (Moody's previously downgraded the Class B Notes from Baa3 to Ba1on March 3, 1999.) According to Moody's, the current downgrades result from (i) significant loss of par on the underlying collateral pool resulting in a violation of the Class B Overcollateralization Ratio Test and (ii) a sharp deterioration in the credit quality of the collateral pool. The rating agency noted that since the transaction closed on April 8, 1998, significant defaults within the original collateral pool have been coupled with recoveries far below historical averages. Moreover, the portion of the collateral pool rated Caa1 or lower--now 17%--has more than doubled since March 23, 1999. Almost two-thirds of this segment of the portfolio is rated Ca. Citing concerns that the collateral quality may continue to deteriorate and that defaults may continue to yield recoveries below historical averages, Moody's indicated that the Class A-2 Notes, the Class A-3 Notes and the Class B Notes all remain on watch for further downgrade.
According to the rating agency, the reduction in collateral coverage and the credit quality of the underlying assets has boosted the expected loss associated with both the Class A-2 Notes/Class A-3 Notes and the Class B Notes to a point no longer consistent with their respective ratings of Aa2 and Ba1.
The impact of these factors on the Class A-1 Notes (rated Aaa) is less pronounced, Moody's says, because this tranche is better insulated by the credit enhancement inherent in the structure and this rating is therefore confirmed. Hence, Moody's is confirming its rating on the Class A-1 Notes. Moody's noted that should the pool continue to deteriorate to the point where the principal value of the collateral, plus eligible investments, falls short of the combined balance of the outstanding Class A-1, Class A-2, Class A-3 and Class B Notes, a technical event of default will be triggered under the Indenture. In Moody's opinion, however, such an event would pose no significant threat of loss to investors in the senior-most class.
The ratings of the following tranches were downgraded and remain on watch for further possible downgrades:
Issuer: ML CBO XIV (Cayman) Ltd.:
Tranche description: $67MM Class A-2 Floating Rate Second Senior Secured Notes Due 2010
Previous Rating: Aa2
New Rating: A1
Tranche description: $50MM Class A-3 Fixed Rate Second Senior Secured Notes Due 2010
Previous Rating: Aa2
New Rating: A1
Tranche description: $32MM Class B Floating Rate Third Senior Secured Notes Due 2010
Previous Rating: Ba1
New Rating: Ba3
The rating of the following tranche was confirmed:
Tranche description: $59MM Class A-1 Fixed Rate Senior Secured Notes Due 2007*
* As of 5/6/99, the outstanding balance of these notes is $53.2 MM
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