New York, July 03, 2013 -- Moody's Investors Service announced today that it has affirmed the ratings
of the following notes issued by US Capital Funding III, Ltd.:
Issuer: US Capital Funding III, Ltd.
U.S. $111,000,000 Class A-1 Floating
Rate Senior Notes Due 2035 (current balance of $52,326,740),
Affirmed Baa2 (sf); previously on August 31, 2009 Downgraded
to Baa2 (sf)
U.S. $23,000,000 Class A-2 Floating
Rate Senior Notes Due 2035, Affirmed Ba1 (sf); previously on
August 31, 2009 Downgraded to Ba1 (sf)
U.S. $39,100,000 Class B-1 Floating
Rate Senior Subordinate Notes Due 2035, Affirmed Ca (sf); previously
on March 27, 2009 Downgraded to Ca (sf)
U.S. $48,000,000 Class B-2 Fixed/Floating
Rate Senior Subordinate Notes Due 2035, Affirmed Ca (sf); previously
on March 27, 2009 Downgraded to Ca (sf)
Issuer: USCFIII 2.5% Combination Security Trust -
Series A
U.S. $7,500,000 Series A Trust Units
(current rated balance of $5,692,417), Affirmed
Caa2 (sf); previously on April 9, 2009 Downgraded to Caa2 (sf)
RATINGS RATIONALE
According to Moody's, today's affirmation is primarily
the result of a reduced likelihood for the deal to trigger an event of
default and accelerate the notes, which offsets the credit performance
improvement of the transaction. In addition, there is an
increase in the assumed defaulted amount.
Moody's notes that the Class B notes in this deal are not allowed
to defer interest. In the absence of an acceleration of the notes,
the payment of both current and deferred interest on the Class B notes
is senior in the waterfall before payment of principal to the Class A
notes. The deal will trigger an Event of Default (EoD) if there
is a default on the payment of interest on either the Class A or B notes.
After an EOD occurs, the deal may accelerate the notes or liquidate
the collateral, both of which require the vote from two thirds (66
2/3%) of each class of notes, voting separately. Acceleration
of the notes would be beneficial to the Class A notes as payment to the
Class B notes will be subordinated. In light of the possibility
of acceleration, Moody's performed an analysis assuming that
the deal triggers an EOD and accelerates the notes, in addition
to an analysis assuming that no acceleration occurs. In Moody's
opinion, the probability of EoD in this deal has declined substantially
because of the improvement in credit quality, resulting in a lower
likelihood that an acceleration of the notes, which benefits the
Class A notes, will occur. The modeled output in an EoD and
acceleration scenario can be multiple notches higher for the Class A notes
than in a non-EoD scenario.
Moody's also notes that given the 1) low collateral spreads (2.28%
on average for the floating rate collateral), 2) high CDO liability
spreads and 3) under-collateralization of the Class A and B notes
(around 80%), the deal will have insufficient interest proceeds
to pay current and deferred interest on the Class B notes in the future,
and will thus need to rely on principal proceeds. Such diversion
of principal proceeds may be substantial and will erode the cushion for
the collateral that support the Class A notes.
Moody's observed that there has been deleveraging of the Class A1
notes and, as a result, an improvement in the transaction's
overcollateralization ratios. The Class A-1 notes have been
paid down by approximately 34% or $27 million since the
last review, due to diversion of excess interest proceeds and disbursement
of $26 mm of principal proceeds from redemptions of five underlying
assets (two assets in second half of 2012 and 3 in 2013).
Moody's notes that the key model inputs used by Moody's in its analysis,
such as par, weighted average rating factor, diversity score,
and weighted average recovery rate, are based on its published methodology
and may be different from the trustee's reported numbers, as of
June 04, 2013. In its base case, Moody's analyzed
the underlying collateral pool to have a performing par balance of $130.5
million, defaulted/deferring par of $51.2 million,
a weighted average default probability of 17.69% (implying
a WARF of 746), Moody's Asset Correlation of 20.85%,
and a weighted average recovery rate upon default of 10%.
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
Moody's considers the structural protections in the transaction,
the risk of triggering an Event of Default, recent deal performance
under current market conditions, the legal environment, and
specific documentation features. All information available to rating
committees, including macroeconomic forecasts, inputs 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.
US Capital Funding III, Ltd., issued on November 4,
2004, is a collateralized debt obligation backed by a portfolio
of bank trust preferred securities.
The portfolio of this CDO is mainly comprised of trust preferred securities
(TruPS) issued by small to medium sized U.S. community banks
and insurance companies that are generally not publicly rated by Moody's.
To evaluate the credit quality of bank TruPS without public ratings,
Moody's uses RiskCalc model, an econometric model developed by Moody's
KMV, to derive their credit scores. Moody's evaluation of
the credit risk for a majority of bank obligors in the pool relies on
FDIC financial data reported as of Q1-2013.
Moody's also evaluates the sensitivity of the rated transaction to the
volatility of the credit estimates, as described in Moody's Cross-Sector
Rating Methodology "Updated Approach to the Usage of Credit Estimates
in Rated Transactions" published in October 2009.
The methodologies used in these ratings were "Moody's Approach to Rating
TRUP CDOs" published in May 2011, and "Using the Structured
Note Methodology to Rate CDO Combo-Notes" published in February
2004. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
The transaction's portfolio was modeled using CDOROM v.2.8-9
to develop the default 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.2.8-9
is available on moodys.com under Products and Solutions --
Analytical models, upon return of a signed free license agreement.
Moody's performed a number of sensitivity analyses of the results to certain
key factors driving the ratings. We analyzed the sensitivity of
the model results to changes in the portfolio WARF (representing an improvement
or a deterioration in the credit quality of the collateral pool),
assuming that all other factors are held equal. If the WARF is
increased by 54 points from the base case of 746, the model-implied
rating of the Class A-1 Notes is one notch worse than the base
case result. Similarly, if the WARF is decreased by 141 points,
the model-implied rating of the Class A-1 Notes is one notch
better than the base case result.
In addition, Moody's also performed two additional sensitivity
analyses as described in the Special Comment "Sensitivity Analyses
on Deferral Cures and Default Timing for Monitoring TruPS CDOs"
published in August 2012. In the first, we gave par credit
to banks that are deferring interest on their TruPS but satisfy specific
credit criteria and thus have a strong likelihood of resuming interest
payments. Under this sensitivity analysis, we gave par credit
to $9.2 million of bank TruPS. In the second sensitivity
analysis, we ran alternative default-timing profile scenarios
to reflect the lower likelihood of a large spike in defaults. Below
is a summary of the impact on all rated notes (shown in terms of the number
of notches' difference versus the current model output, where a
positive difference corresponds to lower expected loss), assuming
that all other factors are held equal:
Sensitivity Analysis 1:
Class A-1: 0
Class A-2: 0
Class B-1: 0
Class B-2: 0
Series A Trust Units: +1
Sensitivity Analysis 2:
Class A-1: 0
Class A-2: 0
Class B-1: 0
Class B-2: 0
Series A Trust Units: 0
Moody's notes that this transaction is still subject to a high level of
macroeconomic uncertainty although our outlook on the banking sector has
changed to stable from negative. The pace of FDIC bank failures
continues to decline in 2013 compared to the last few years, and
some of the previously deferring banks have resumed interest payment on
their trust preferred securities.
Further information on Moody's analysis of this transaction is available
on www.moodys.com.
REGULATORY DISCLOSURES
Moody's did not receive or take into account any third party assessment
on the due diligence performed regarding the underlying assets or financial
instruments related to the monitoring of these transactions in the past
six months.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Rachid Ouzidane
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Rodrigo Araya
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Affirms the ratings of TruPS CDO notes issued by US Capital Funding III, Ltd., and USCF III 2.5% Combination Security Trust
