USD 333.53 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 XVII, Ltd.
U.S. $236,000,000 Class A-1 First
Priority Senior Secured Floating Rate Notes Due 2038 (current balance
of $229,589,147.00), Downgraded to B1
(sf); previously on March 27, 2009 Downgraded to Baa3 (sf);
U.S. $16,000,000 Class A-2 Second
Priority Senior Secured Floating Rate Notes Due 2038, Downgraded
to Caa3 (sf); previously on March 27, 2009 Downgraded to B1
U.S. $44,000,000 Class B Deferrable Third
Priority Secured Floating Rate Notes Due 2038, (current balance
of $44,608,784.65), Downgraded to C (sf);
previously on March 27, 2009 Downgraded to Ca (sf);
U.S. $42,000,000 Class C-1 Deferrable
Fourth Priority Mezzanine Secured Floating Rate Notes Due 2038,
(current balance of $42,796,642.34), Downgraded
to C (sf); previously on March 27, 2009 Downgraded to Ca (sf);
U.S. $500,000 Class C-2 Deferrable Fourth
Priority Mezzanine Secured Fixed/Floating Rate Notes Due 2038, (current
balance of $531,738.70), Downgraded to C (sf);
previously on March 27, 2009 Downgraded to Ca (sf).
Alesco Preferred Funding XVII, Ltd., issued in October
30, 2007, is a collateral debt obligation backed by a managed
portfolio of bank and insurance trust preferred securities (the 'TRUP
CDO'). Moody's indicated that the rating actions on
the notes are primarily the result from the increase in the assumed defaulted
amount, as evidenced by $108 million additional defaults
of the trust preferred securities held in the portfolio since the last
rating action and a decrease in the WARF from 1935 (March 27, 2009)
to 1703 (September 27, 2010). 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.
On March 27, 2009, Moody's downgraded 5 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. In the latest trustee report dated July 30,
2010, the Class A, Class B, Class C, and Class
D overcollateralization ratios are reported at 106.44%,
90.08%, 78.37%, and 70.63%,
respectively, versus trustee reported levels from the report dated
January 30, 2009 of 145.73%, 123.99%,
108.38%, 98.41%, 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 remain negative.
Cumulative assumed defaults now total $167 million (42%
of the portfolio), $108 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
86.23% of the portfolio estimated to be Baa2 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. Meanwhile, 4.28%
of the remaining assets in the portfolio are estimated to be Ba3 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.
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 pool.
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 397 points from the base case of 1703, the model
results in an expected loss that is one notch worse than the result of
the base case for Class A-1. If the WARF is decreased by
203 points, expected losses are one notch better than the base case
results. Additionally, the effects of higher and lower recovery
rates of the collateral pool resulted in the following: Increasing
the weighted average recovery rate by 21 basis points yielded an expected
loss that was not enough to move the rating by one notch up from the base
case for Class A-1. Similarly, decreasing the weighted
average recovery rate by the 104 basis points from the base case resulted
in an expected loss that was not enough to move the rating by one notch
down from the base case for Class A-1.
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 XVII,
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
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.2.7 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.2.7 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.
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 web site, 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 XVII, Ltd.
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