USD $450 million of debt securities affected
New York, September 28, 2010 -- Moody's Investors Service announced today that it has downgraded notes
issued by Alesco Preferred Funding XVI, Ltd.:
U.S. $349,000,000 Class A First Priority
Senior Secured Floating Rate Notes due March 23, 2038 (current balance
of $341,459,316), Downgraded to Ba3 (sf);
previously on March 27, 2009 Downgraded to Baa3 (sf);
U.S. $20,000,000 Class B Deferrable Second
Priority Secured Fixed/Floating Rate Notes due March 23, 2038 (current
balance of $21,311,048), Downgraded to Ca (sf);
previously on March 27, 2009 Downgraded to Caa3 (sf);
U.S. $85,250,000 Class C Deferrable Third
Priority Mezzanine Secured Floating Rate Notes due March 23, 2038
(current balance of $87,031,352), Downgraded
to C (sf); previously on March 27, 2009 Downgraded to Ca (sf).
Alesco Preferred Funding XVI, Ltd., issued on June
28, 2007, is a collateralized debt obligation backed by a
managed portfolio of bank and insurance trust preferred securities (the
'TRUP CDO'). On March 27, 2009, Moody's downgraded
3 classes of notes as a 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.
Moody's indicated that the rating actions on the notes are primarily the
result of an increase in the assumed defaulted amount, as evidenced
by $96.25 million additional defaults of the trust preferred
securities held in the portfolio since the last rating action.
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. In addition,
the overcollateralization tests continue to breach their triggers which
has resulted in a diversion of excess spreads to pay down senior notes.
As of the latest trustee report dated July 30, 2010, the Class
A overcollateralization ("OC") ratio was 107.59%,
the Class B OC ratio was 101.27%, and the Class C
OC ratio was 81.67%, versus trustee reported levels
from the report dated January 31, 2009 of 132.08%,
124.87%, and 101.30%, 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,
127 U.S. banks have failed to date this year, while
140 banks failed in 2009, as compared to 25 in all of 2008.
In Moody's opinion, the banking sector outlook continues to remain
negative while insurance is stabilizing with the exception to commercial
P&C insurance, which remains negative.
Cumulative assumed defaults now total $168.25 million,
33.7% of the portfolio, $96.25 million
of which have occurred since the previous rating action. All the
assumed defaulted assets are carried at zero recovery in our analysis.
The remaining assets in the portfolio have also suffered credit deterioration,
with now almost 30% of the portfolio estimated to be Ba1 or below,
as determined using FDIC Q1-2010 financial data in conjunction
with Moody's RiskCalc model to assess non-publicly rated bank trust
preferred securities. Similarly, 6.9% of the
remaining assets in the portfolio are estimated to be Ba1 or below by
Moody's Insurance team using insurance companies financial data.
Given the current market conditions, we have assumed in our analysis
that there are no amortizations and thus, the WAL of the portfolio
is around 27. Our cash-flow modeling analysis is described
in Moody's Rating Methodology publication titled "Moody's Approach To
Rating U.S. Bank Trust Preferred Security CDOs", June
2010, under Appendix A (page 8).
The portfolios of these CDOs are mainly composed of trust preferred securities
issued by small to medium sized U.S. community bank and
insurance companies 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 1 and 2 notches, depending
on the total amount and relative size of these securities in the collateral
Moody's evaluation of this transaction relies on financial data received
for a majority of obligors in the pool as of Q1-2010. This
financial data is used by Moody's to assess the credit quality of 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 increases and decreases to 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 205 points from the base case of 1320, the model
results in an expected loss that is one notch worse than the result of
the base case for Class A. If the WARF is decreased by 45 points,
expected losses are one notch better than the base case results.
Additionally, the effects of higher and lower spread and coupon
rates of the collateral pool resulted in the following: Increasing
both the weighted average spread (WAS) and weighted average coupon (WAC)
by 25 basis points yielded an expected loss that is one notch better than
the results from the base case. Conversely, decreasing the
spread and coupon by the 50 basis points from the base case resulted in
an expected loss that is one notch worse than the results from the base
case for Class A.
Additional sources of uncertainty to the evaluation assumptions result
from continued negative outlook of the underlying collateral portfolio
sectors, especially in the banking industry where we anticipate
more bank closures by the FDIC in 2010 as compared to previous years.
In addition, to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
These qualitative factors include, among other elements, an
assessment of the collateral manager track record and practices.
In particular, Moody's looked at the quality of information provided
by the manager, its interpretation of the documentation and level
of diligence in the implementation of the transaction criteria.
Moody's considers as well the structural protections in each transaction,
the recent deal performance in the current market environment, 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 XVI,
Ltd. were "Moody's Approach to Rating U.S. Bank Trust
Preferred Security CDOs" published in June 2010, "Moody's Approach
to Rating Insurance Trust Preferred Security CDOs" published in June 2010,
and "Updated Approach to the Usage of Credit Estimates in Rated Transactions"
published in October 2009. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found on Moody's website.
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 6 months.
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 CDOROMTM 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.
CDOROMTM v.2.6 is available on moodys.com under Products
and Solutions -- Analytical models, upon return of
a signed free license agreement.
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.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Credit Policy & Methodologies
directory. 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 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.
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Downgrades the ratings of TRUP CDO notes issued by Alesco Preferred Funding XVI, Ltd.
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