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Rating Action:

Moody's Downgrades the ratings of TRUP CDO notes issued by Preferred Term Securities II, Ltd.

22 Oct 2010

USD 165.55 million of debt securities affected

New York, October 22, 2010 -- Moody's Investors Service announced today that it has downgraded notes issued by Preferred Term Securities II, Ltd. The notes affected by today's rating action are as follows:

U.S. $227,750,000 Floating Rate Senior Notes (current balance $165,553,851.67), Downgraded to Baa3 (sf); previously on March 27, 2009 Downgraded to Baa1 (sf)

RATINGS RATIONALE

Preferred Term Securities II, Ltd. is a collateral debt obligation backed by a portfolio of bank trust preferred securities (the 'TRUP CDO') and it was issued in February 22, 2001. According to Moody's, the rating downgrade action on the notes today is the result of a significant increase in the defaults and deferrals on the trust preferred securities held in the portfolio. Such negative performance has been observed through an increase of $67.7 million of additional assumed defaults. Due to the removal of these additional assumed defaulted assets from the portfolio, the Weighted Average Rating Factor has improved slightly.

On March 27, 2009, Moody's downgraded two 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 and since then the Weighted Average Rating Factor (WARF) has slightly improved by 313 from 1266 (March 27, 2009) to 953 (October 20, 2010).

Moody's notes that the current cumulative assumed defaulted amount in this transaction reached $132.2 million or 43% of the portfolio, $67.7 million of which have occurred since the last rating action. All the assumed defaulted assets are carried at zero recovery in our analysis. The par loss due to the increase in the assumed defaulted amount has resulted in loss of overcollateralization for the rated tranches. In addition, the principal coverage tests continue to breach their triggers, resulting in a diversion of excess spreads to pay down senior notes. As of the latest trustee note valuation report dated September 24, 2010, Senior and Mezzanine Principal Coverage tests were reported at 114.41% (limit 137%) and 71.84% (limit 103%), respectively, versus previous levels of 130.1% and 87.51%, respectively as reported by the trustee on March 2009.

The credit deterioration in this portfolio is a reflection of the continued distress in some part of the banking sector as the number of bank failures and interest deferrals of trust preferred securities issued by regional and community banks continued to increase. According to FDIC data, additional 251 banks have failed since last rating action; 132 U.S. banks have failed so far 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.

Given the current market conditions, we have assumed in our cash-flow modeling analysis that there are no amortizations and the WAL of the portfolio is around 21 years. 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).

This portfolio is mainly composed of trust preferred securities issued by small to medium sized U.S. community banks 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 may vary 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 bank 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, using 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 down 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 on some of the key factors driving the ratings. The sensitivity analysis includes further increase and decrease to the WARF (representing a slight improvement and a slight deterioration of the credit quality of the collateral pool) and the results indicate a one-notch downward movement on Senior Notes when WARF was increased by 297 and a one-notch upward movement when the WARF was decreased by 153.

In addition, to the quantitative factors that are explicitly modeled, qualitative factors are parts 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 Preferred Term Securities II, Ltd. were "Moody's Approach to Rating U.S. Bank 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 using CDOROM v.2.7, according to our rating approach, 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. CDOROM v.2.7 is available on moodys.com under Products and Solutions -- Analytical models, upon return of a signed free license agreement.

REGULATORY DISCLOSURES

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.

New York
Rachid Ouzidane
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Rodrigo Araya
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's Downgrades the ratings of TRUP CDO notes issued by Preferred Term Securities II, Ltd.
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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