Approximately $330.4 Million of Structured Securities Affected
New York, January 28, 2011 -- Moody's has affirmed one and downgraded seven classes of Notes issued
by Newcastle CDO IV, Ltd. due to the deterioration in the
credit quality of the underlying portfolio as evidenced by an increase
in the weighted average rating factor (WARF), and a decrease in
weighted average recovery rate. The rating action is the result
of Moody's on-going surveillance of commercial real estate
collateralized debt obligation (CRE CDO) transactions.
Class I-MM Floating Rate Notes, Affirmed at Baa1 (sf);
previously on Feb 24, 2010 Downgraded to Baa1 (sf)
Class II-FL Deferrable Floating Rate Notes, Downgraded to
B2 (sf); previously on Feb 24, 2010 Downgraded to Ba2 (sf)
Class II-FX Deferrable Fixed Rate Notes, Downgraded to B2
(sf); previously on Feb 24, 2010 Downgraded to Ba2 (sf)
Class III-FL Deferrable Floating Rate Notes, Downgraded to
Caa2 (sf); previously on Feb 24, 2010 Downgraded to B2 (sf)
Class III-FX Deferrable Fixed Rate Notes, Downgraded to Caa2
(sf); previously on Feb 24, 2010 Downgraded to B2 (sf)
Class IV-FL Deferrable Floating Rate Notes, Downgraded to
Ca (sf); previously on Feb 24, 2010 Downgraded to Caa3 (sf)
Class IV-FX Deferrable Fixed Rate Notes, Downgraded to Ca
(sf); previously on Feb 24, 2010 Downgraded to Caa3 (sf)
Class V Deferrable Fixed Rate Notes, Downgraded to C (sf);
previously on Feb 24, 2010 Downgraded to Ca (sf)
Newcastle CDO IV, Ltd. is a CRE CDO transaction backed by
a portfolio of commercial mortgage backed securities (CMBS) (46.2%),
REIT debt (24.9%), CMBS rake-bonds (15.8%),
residential mortgage backed securities (RMBS) (10.5%),
small business loans (1.5%), and real estate bank
loans (1.1%). As of the December 17, 2010 Trustee
report, the aggregate Note balance of the transaction has decreased
to $352.9 million from $446.1 million at issuance,
with the paydown directed to the Class I Notes. The paydowns are
a result of the failure of the Class I, Class II, Class II,
and Class IV Par Value Tests. Per the Trust Deed dated March 30,
2004, upon the failure of any Par Value Test, all scheduled
interest and principal payments are directed to pay down the most senior
notes, until the failed Par Value Test is satisfied. Additionally,
there is currently approximately $4.8 million in accrued
interest proceeds to Class II, Class III, Class IV,
and Class V.
Fifteen assets with a par balance of $45.4 million (12.3%
of the pool balance) were reported as Defaulted Securities as of the December
17, 2010 Trustee report. Four of these assets (31.9%
of the defaulted balance) are REIT debt, five assets (26.5%)
are RMBS, three assets (25.6%) are CMBS, and
three assets (16.1%) are CMBS rake-bonds.
While there have been no realized losses to date, Moody's
does expect significant losses to occur once they are realized.
Moody's has identified the following parameters as key indicators of the
expected loss within CRE CDO transactions: WARF, weighted
average life (WAL), weighted average recovery rate (WARR),
and Moody's asset correlation (MAC). These parameters are typically
modeled as actual parameters for static deals and as covenants for managed
WARF is a primary measure of the credit quality of a CRE CDO pool.
We have completed updated credit estimates for the non-Moody's
rated securities. The bottom-dollar WARF is a measure of
the default probability within a collateral pool. Moody's
modeled a bottom-dollar WARF excluding defaulted securities,
of 2,009 compared to 1,186 at last review. The distribution
of current ratings and credit estimates is as follows: Aaa-Aa3
(3.6% compared to 8.1% at last review),
A1-A3 (6.4% compared to 8.9% at last
review), Baa1-Baa3 (35.8% compared to 39.0%
at last review), Ba1-Ba3 (27.3% compared to
37.1% at last review), B1-B3 (9.4%
compared to 1.3% at last review), and Caa1-C
(17.6% compared to 5.5% at last review).
WAL acts to adjust the probability of default of the securities in the
pool for time. Moody's modeled to a WAL of 3.2 years compared
to 3.6 years at last review.
WARR is the par-weighted average of the mean recovery values for
the collateral assets in the pool. Moody's modeled a fixed
WARR of 23.0% compared to 28.1% at last review.
MAC is a single factor that describes the pair-wise asset correlation
to the default distribution among the instruments within the collateral
pool (i.e. the measure of diversity). Moody's
modeled a MAC of 10.6% compared to 20.2% at
Moody's review incorporated CDOROM® v2.6, one of Moody's
CDO rating models, which was released on May 27, 2010.
The cash flow model, CDOEdge® v3.2, was used to
analyze the cash flow waterfall and its effect on the capital structure
of the deal.
Changes in any one or combination of the key parameters may have rating
implications on certain classes of rated notes. However,
in many instances, a change in key parameter assumptions in certain
stress scenarios may be offset by a change in one or more of the other
key parameters. Rated notes are particularly sensitive to changes
in recovery rate assumptions. Holding all other key parameters
static, changing the recovery rate assumption down from 23.0%
to 13.0% or up to 33.0% would result in average
rating movement on the rated tranches of 0 to 1 notches downward and 0
to 3 notches upward, respectively.
The performance expectations for a given variable indicate Moody's forward-looking
view of the likely range of performance over the medium term. From
time to time, Moody's may, if warranted, change these
expectations. Performance that falls outside the given range may
indicate that the collateral's credit quality is stronger or weaker than
Moody's had anticipated when the related securities ratings were issued.
Even so, a deviation from the expected range will not necessarily
result in a rating action nor does performance within expectations preclude
such actions. The decision to take (or not take) a rating action
is dependent on an assessment of a range of factors including, but
not exclusively, the performance metrics. Primary sources
of assumption uncertainty are the current stressed macroeconomic environment
and continuing weakness in the commercial real estate and lending markets.
Moody's currently views the commercial real estate market as stressed
with further performance declines expected in a majority of property sectors.
The availability of debt capital is improving with terms returning towards
market norms. Job growth and housing price stability will be necessary
precursors to commercial real estate recovery. Overall, Moody's
central global scenario remains "hook-shaped" for 2010
and 2011; we expect overall a sluggish recovery in most of the world's
largest economies, returning to trend growth rate with elevated
fiscal deficits and persistent unemployment levels.
The principal methodologies used in these ratings were "CMBS: Moody's
Approach to Rating Static CDOs Backed by Commercial Real Estate Securities"
published in June 2004, and "Moody's Approach to Rating SF CDOs"
published in November 2010.
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 website, at www.moodys.com/SFQuickCheck.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
related to the monitoring of this transaction in the past six months.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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.
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Michael M. Gerdes
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Affirms One and Downgrades Seven CRE CDO Classes of Newcastle CDO IV, Limited
250 Greenwich Street
New York, NY 10007