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Related Issuers
Rating Action:

Moody's Upgrades its rating of Credit Protection Trust 259, a CSO

04 Feb 2011

USD 1B of debt securities affected

New York, February 04, 2011 -- Moody's Investors Service announced today the following rating action on Credit Protection Trust 259, a collateralized debt obligation transaction (the " Collateralized Synthetic Obligation" or "CSO").

The CSO, issued in 2007, references a portfolio of corporate synthetic senior unsecured bonds.

Issuer: Credit Protection Trust 259

....US$1,000,000,000 Super Senior, Upgraded to A2 (sf); previously on Sep 4, 2009 Downgraded to Ba1 (sf)

RATING RATIONALE

Moody's rating action today is the result of the credit improvement of the underlying portfolio, the level of credit enhancement remaining in the transaction and the shortened time to maturity of the CSO.

Since the last rating action in September 2009, the 10-year weighted average rating factor (WARF) of the portfolio improved from 4412 to 3790, equivalent to Caa1, including settled credit events. The portfolio continues to improve with 29 percent of the portfolio rated Caa1 or below, compared to 43 percent since the last rating action took place. There are six reference entities with a negative outlook and one entity on watch for downgrade compared to 25 entities on negative outlook and two on watch for downgrade as of the previous rating action date. As of today, eleven reference entities are on positive outlook and two are on review for possible upgrade versus four on positive outlook and zero on review for possible upgrade as of the previous rating action date.

There is approximately 36% subordination remaining in the deal. There have been no credit events since the last rating action. The portfolio has experienced eight credit events since inception, equivalent to a ten percent loss of the portfolio based on the portfolio notional value at closing. Although Clear Channel Communications, Dynegy Inc., Harrah's Operating Company and Residential Capital, LLC, have not experienced a credit event so far, Moody's assumptions for modeling purposes treat them as defaulted given their low rating combined with a negative outlook or a review for possible downgrade, if any.

The CSO has a remaining life of 3.38 years.

Moody's rating action today factors in a number of sensitivity analyses and stress scenarios, discussed below. Results are given in terms of the number of notches' difference versus the base case, where higher notches correspond to lower expected losses, and vice-versa:

• Moody's reviews a scenario consisting of reducing the maturity of the CSO by 6 months, keeping all other parameters constant. The result of this run is comparable to the base case.

• Market Implied Ratings ("MIRS") are modeled in place of the corporate fundamental ratings to derive the default probability of the reference entities in the portfolio. The gap between an MIR and a Moody's corporate fundamental rating is an indicator of the extent of the divergence in credit view between Moody's and the market. The result of this run is two notches higher than that of the base case.

• Moody's performs a stress analysis consisting of defaulting all entities rated Caa1 and below. The result of this run is three notches lower than in the base case.

• Moody's conducts a sensitivity analysis consisting of notching down by one the ratings of the most referenced industry ( High Tech Industries, 13.75% of the portfolio). The result of this run is comparable to the base case.

• Removing the notch-down adjustment on ratings of all reference entities on negative outlook and/or on watch for downgrade generates a result that is comparable to the base case.

In addition to the quantitative factors that are explicitly modeled, qualitative factors are part of rating committee considerations. These qualitative factors include 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 methodology used in these ratings was "Moody's Approach to Corporate Collateralized Synthetic Obligations" published in September 2009.

Moody's analysis for this transaction is based on CDOROM v2.8.

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 six months.

Due to the impact of revised and updated key assumptions referenced in "Moody's Approach to Rating Corporate Synthetic Obligations", key model inputs used by Moody's in its analysis may be different from the manager/arranger'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".

Moody's does not run a separate loss and cash flow analysis other than the one already done by the CDOROM model. For a description of the analysis, refer to the methodology and the CDOROM user's guide on Moody's website.

Moody's analysis of CSOs is subject to uncertainties, the primary sources of which include complexity, governance and leverage. Although the CDOROM model captures many of the dynamics of the Corporate CSO structure, it remains a simplification of the complex reality. Of greatest concern are (a) variations over time in default rates for instruments with a given rating, (b) variations in recovery rates for instruments with particular seniority/security characteristics and (c) uncertainty about the default and recovery correlations characteristics of the reference pool. Similarly on the legal/structural side, the legal analysis although typically based in part on opinions (and sometimes interpretations) of legal experts at the time of issuance, is still subject to potential changes in law, case law and the interpretations of courts and (in some cases) regulatory authorities. The performance of this CSO is also dependent on on-going decisions made by one or several parties, including the Manager and the Trustee. Although the impact of these decisions is mitigated by structural constraints, anticipating the quality of these decisions necessarily introduces some level of uncertainty in our assumptions. Given the tranched nature of CSO liabilities, rating transitions in the reference pool may have leveraged rating implications for the ratings of the CSO liabilities, thus leading to a high degree of volatility. All else being equal, the volatility is likely to be higher for more junior or thinner liabilities.

The base case scenario modeled fits into the central macroeconomic scenario predicted by Moody's of a sluggish recovery scenario in the corporate universe. Should macroeconomics conditions evolve towards a more severe scenario, such as a double dip recession, the CSO rating will likely be downgraded to an extent that depends on the expected severity of the worsening conditions.

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.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: public 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.

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

New York
Dimitri Kaltsas
Associate Analyst
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.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Upgrades its rating of Credit Protection Trust 259, a CSO
No Related Data.
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