Approximately $219.1 Million of Structured Securities Affected
New York, December 15, 2011 -- Moody's has upgraded the ratings of three and affirmed the ratings of
five classes of Notes issued by Newcastle CDO IV, Ltd. due
to improvement in the underlying collateral as evidenced by the Moody's
weighted average rating factor (WARF), and improvement in the par
value ratios. The affirmations are due to key transaction parameters
performing within levels commensurate with the existing ratings levels.
The rating action is the result of Moody's on-going surveillance
of commercial real estate collateralized debt obligation (CRE CDO and
Re-Remic) transactions.
Cl. I-MM Floating Rate Notes, Upgraded to A2 (sf);
previously on Feb 24, 2010 Downgraded to Baa1 (sf)
Cl.II-FL Deferrable Floating Rate Notes, Upgraded
to Ba3 (sf); previously on Jan 28, 2011 Downgraded to B2 (sf)
Cl.II-FX Deferrable Fixed Rate Notes, Upgraded to
Ba3 (sf); previously on Jan 28, 2011 Downgraded to B2 (sf)
Cl.III-FL Deferrable Floating Rate Notes, Affirmed
at Caa2 (sf); previously on Jan 28, 2011 Downgraded to Caa2
(sf)
Cl.III-FX Deferrable Fixed Rate Notes, Affirmed at
Caa2 (sf); previously on Jan 28, 2011 Downgraded to Caa2 (sf)
Cl.IV-FL Deferrable Floating Rate Notes, Affirmed
at Ca (sf); previously on Jan 28, 2011 Downgraded to Ca (sf)
Cl.IV-FX Deferrable Fixed Rate Notes, Affirmed at
Ca (sf); previously on Jan 28, 2011 Downgraded to Ca (sf)
Cl.V Deferrable Fixed Rate Notes, Affirmed at C (sf);
previously on Jan 28, 2011 Downgraded to C (sf)
RATINGS RATIONALE
Newcastle CDO IV, Ltd. is a currently static (the reinvestment
period ended in March 2009) cash CRE CDO transaction backed by a portfolio
of commercial mortgage backed securities (CMBS) (45.3% of
the pool balance), real estate investment trust (REIT) debt (20.2%),
rake bonds (19.8%), asset backed securities primarily
in the form of residential mortgage backed securities (9.4%),
b-notes (4.5%) and real estate bank loans (0.8%).
As of the September 26, 2011 Note Valuation report, the aggregate
Note balance of the transaction, including preferred shares,
has decreased to $241.6 million from $450.0
million at issuance, with the paydown directed to the Class I Notes,
as a result of regular amortization of the underlying collateral and failure
of the par value tests. Additionally, there have been partial
cancellations to Class III-FX and Class IV-FL.
There are two assets with a par balance of $3.6 million
(1.7% of the current pool balance) that are considered Defaulted
Securities as of the November 30, 2011 Trustee report. While
there have been realized losses on the underlying collateral to date,
Moody's does expect significant losses to occur on the Defaulted
Securities once they are realized.
Moody's has identified the following parameters as key indicators of the
expected loss within CRE CDO transactions: weighted average rating
factor (WARF), weighted average life (WAL), weighted average
recovery rate (WARR), and Moody's asset correlation (MAC).
These parameters are typically modeled as actual parameters for static
deals and as covenants for managed deals.
WARF is a primary measure of the credit quality of a CRE CDO pool.
We have completed updated credit estimates for the non-Moody's
rated collateral. The bottom-dollar WARF is a measure of
the default probability within a collateral pool. Moody's
modeled a bottom-dollar WARF of 1,394 compared to 2,009
at last review. The distribution of current ratings and credit
estimates is as follows: Aaa-Aa3 (2.3% compared
to 3.6% at last review), A1-A3 (0.2%
compared to 6.4% at last review), Baa1-Baa3
(45.9% compared to 35.8% at last review),
Ba1-Ba3 (30.6% compared to 27.3% at
last review), B1-B3 (16.2% compared to 9.4%
at last review), and Caa1-C (4.8% compared
to 17.6% at last review).
WAL acts to adjust the probability of default of the collateral in the
pool for time. Moody's modeled to a WAL of 3.2 years,
the same as that at last review.
WARR is the par-weighted average of the mean recovery values for
the collateral assets in the pool. Moody's modeled a fixed
WARR of 20.0% compared to 23.0% at last review.
MAC is a single factor that describes the pair-wise asset correlation
to the default distribution among the instruments within the collateral
pool (i.e. the measure of diversity). Moody's
modeled a MAC of 20.7% compared to 10.6% at
last review.
Moody's review incorporated CDOROM® v2.8, one of Moody's
CDO rating models, which was released on January 24, 2011.
The cash flow model, CDOEdge® v3.2.1.0,
was used to analyze the cash flow waterfall and its effect on the capital
structure of the deal.
Changes in any one or combination of the key parameters may have rating
implications on certain classes of rated notes. However,
in many instances, a change in key parameter assumptions in certain
stress scenarios may be offset by a change in one or more of the other
key parameters. Rated notes are particularly sensitive to changes
in recovery rate assumptions. Holding all other key parameters
static, changing the recovery rate assumption down from 20.0%
to 30.0% or up to 10.0% would result in average
modeled rating movement on the rated tranches of 0 to 2 notches downward
and 0 to 1 notches upward, respectively.
The performance expectations for a given variable indicate Moody's forward-looking
view of the likely range of performance over the medium term. From
time to time, Moody's may, if warranted, change these
expectations. Performance that falls outside the given range may
indicate that the collateral's credit quality is stronger or weaker than
Moody's had anticipated when the related securities ratings were issued.
Even so, a deviation from the expected range will not necessarily
result in a rating action nor does performance within expectations preclude
such actions. The decision to take (or not take) a rating action
is dependent on an assessment of a range of factors including, but
not exclusively, the performance metrics.
Primary sources of assumption uncertainty are the extent of the slowdown
in growth in the current macroeconomic environment and the commercial
real estate property markets. While commercial real estate property
markets are gaining momentum, a consistent upward trend will not
be evident until the volume of transactions increases, distressed
properties are cleared from the pipeline and job creation rebounds.
The hotel and multifamily sectors are in recovery and improvements in
the office sector continue, with fundamentals in Gateway cities
outperforming their suburban counterparts. However, office
demand is closely tied to employment, where fundamentals remain
weak, so significant improvement may be delayed. Performance
in the retail sector has been mixed with on-going rent deflation
and leasing challenges. Across all property sectors, the
availability of debt capital continues to improve with monetary policy
expected to remain supportive and interest rate hikes postponed.
Moody's central global macroeconomic scenario reflects an overall downward
revision of forecasts since last quarter, amidst ongoing fiscal
consolidation efforts, household and banking sector deleveraging,
persistently high unemployment levels, and weak housing markets
that will continue to constrain growth.
The methodologies used in this rating were "Moody's Approach to Rating
SF CDOs" published in November 2010, and "Moody's Approach to Rating
Commercial Real Estate CDOs" published in July 2011. Please see
the Credit Policy page on www.moodys.com for a copy of these
methodologies.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 31 January
2012. ESMA may extend the use of credit ratings for regulatory
purposes in the European Community for three additional months,
until 30 April 2012, if ESMA decides that exceptional circumstances
arise that may imply potential market disruption or financial instability.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
Information sources used to prepare the rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics information.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a 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 the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 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.
Romina Padhi
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
Michael M. Gerdes
MD - Structured Finance
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 Upgrades Three and Affirms Five Classes of Newcastle CDO IV, Ltd.
