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Rating Action:

Moody's Affirms the ratings of TruPS CDO notes issued by US Capital Funding III, Ltd., and USCF III 2.5% Combination Security Trust

03 Jul 2013

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
No Related Data.
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