Approximately JPY 2.65 billion in Notes affected
Tokyo, February 09, 2011 -- Moody's Japan K.K. has assigned provisional ratings to the
Synthetic CLOs of Regional Financial Institutions (Clover, LLC.)
referencing corporate loans to small and medium-sized Japanese
enterprises (SMEs).
The ratings address the expected loss posed to investors by the final
maturity date. The structure allows for the timely payments of
interest and ultimate payment of principal by the final maturity date.
The rated promise on the Class C notes is that the total amount of principal
paid on the notes be equal to the initial principal amount of the notes.
The rating on the Class C notes does not take into account interest payments.
Moody's issues provisional ratings in advance of the final sale of securities.
These ratings, however, represent Moody's preliminary credit
opinions only. Upon a conclusive review of the transaction and
associated documentation, Moody's will endeavor to assign definitive
ratings to the securities. Definitive ratings may differ from provisional
ratings. The provisional rating is based on information received
as of February 8, 2011.
The complete rating actions are as follows:
Deal Name: Synthetic CLO of Regional Financial Institutions (Clover,
LLC.)
Issuer: Clover, LLC.
Class, Issue Amount, Rating
Series One Class A Unsecured Notes, JPY 1,900,000,000,
(P)Aaa (sf)
Series One Class B Unsecured Notes, JPY 578,646,000,
(P)Baa2 (sf)
Series One Class C Unsecured Notes, JPY 175,928,000,
(P)Caa2 (sf)*
*The rating on the Class C notes does not take into account interest
payments.
Scheduled Interest Rate: Floating
Payment Frequency: Quarterly
Expected Issue Date: March 11, 2011
Final Maturity Date: May 28, 2014
Reference Obligation: Loans to small and medium-sized enterprises
(SMEs) in Japan
Initial Total Reference Obligation Amount: JPY 3,141,574,000
Number of Obligors: 140 (The obligor with the highest loan amount
comprises approximately 3% of the Initial Total Reference Obligation
Amount.)
Originator/First CDS Buyer/Servicer: THE SAIKYO SHINKIN BANK,
Toyama Shinkin Bank, KITAISEUENO SHINKIN BANK, Osaka Shinkin
Bank, The Awaji Shinkin Bank
First CDS Seller/Second CDS Buyer: Japan Finance Corporation (JFC,
Aa2)
Second CDS Seller: Clover, LLC.
Independent Auditor: Tokyo Kyodo Accounting Office
Note Trustee/Initial Deposit Bank: Mizuho Corporate Bank,
Ltd. (Mizuho Corporate Bank, Aa3/P-1)
Calculation Agent: Mizuho Trust & Banking Co.,
Ltd.
Arranger: Mitsubishi UFJ Morgan Stanley Securities Co.,
Ltd.
RATING RATIONALE
JFC and each originator will enter a credit default swap (First CDS) agreement
that references a pool of corporate loans for SMEs from each originator.
The originators, as the protection buyers under the First CDS agreements,
will pay a premium to JFC, as the protection seller, which
in turn will make a credit protection payment to each of the originators
(under certain conditions) if the reference pool suffers a credit event.
JFC will enter a credit default swap (Second CDS) agreement with the Issuer
to transfer the credit risk proceeds from the First CDS agreements to
the Issuer. JFC, as the protection buyer under the Second
CDS agreement, will pay a premium to the Issuer, as the protection
seller, which in turn will make a credit protection payment to JFC
(under certain conditions) if the reference pool suffers a credit event.
The Issuer will issue the Class A, B, and C Notes.
At closing, the proceeds from the notes will be deposited into fixed-term
deposit accounts at Mizuho Corporate Bank. The deposit will be
used for the principal payment and credit protection payment.
Credit enhancement is provided by the senior/subordinated structure.
Subordination comprises around 39.5% for the Class A Note,
21.1% for the Class B Note, and 15.5%
for the Class C Note. The formula used to calculate the subordination
in this transaction is A / B, where "A" equals the total
principal amount of the Notes subordinated to the subject Notes and the
total amount of the credit protection threshold, and "B"
equals the initial total reference obligation amount.
The Originators will individually hold the credit protection threshold
amounts and use them to cover losses incurred on the loans that they themselves
have originated (the "sub-pool"). The credit protection
threshold amounts cannot be used to cover losses incurred against other
sub-pools. However, the Class B and C Unsecured Notes
can be used to cover losses incurred in all the sub-pools.
Redemption of the Class A and B Notes will be made every quarter on a
pass-through basis (basically pro-rata) in accordance with
reductions in the notional amounts. Redemptions of the Class C
Note will be made by hard-bullet payment.
The proceeds from the interest on the deposits and the CDS premium payments
by JFC will be used for the coupon payments on the Class A to C Notes.
The weighted average life of the reference pool is approximately 1.5
years.
The waterfall is designed to prioritize coupon payments on the Class A
and B Notes over the Class C Note if the buyers of the CDS go bankrupt
or fail to pay premiums and then this will result in the termination of
the CDS agreement causing shortfalls in the coupons on the Class A and
B Notes. Liquidity support is also available in the form of a cash
reserve mechanism that sets aside the first and second coupon payments
on the Class C Note.
The ratings are based mainly on the strength of transaction structure,
the credit of the reference obligation, the credit of the deposit
bank and the servicer's experience.
Moody's estimates the annualized expected default rate in the reference
pool at approximately 2.9%, taking into consideration
the attributes of the reference obligations, performance data on
existing securitization pools, macroeconomic trends, and government
support measures for SME financing. Moody's also assumes
a zero recovery rate from a credit event. To determine the rating,
Moody's also conducted a cash flow analysis, adding stress
consistent with the assigned rating on parameters such as the expected
default rate.
The principal payments of the Notes will be deposited into an account
at an eligible financial institution (with a Moody's long-term
deposit rating of A2 or higher and a short-term rating of P-1)
pursuant to the documents governing this transaction. At closing,
the proceeds from the notes will be deposited in fixed-term deposit
accounts at Mizuho Corporate Bank.
Moody's examined the operations of the originator and considers
it sufficiently capable of servicing the reference obligations as servicer,
given its substantial SME lending experience.
The principal methodology used in this rating was Moody's Approach to
Rating Japan SME CDOs published on September 30, 2010, and
available on www.moodys.co.jp.
Moody's did not receive or take into account any third-party
due diligence reports on the underlying assets or financial instruments
in this transaction.
The V score for this transaction is Medium. Moody's has assigned
ratings to JFC's SME CLOs for six years. The reference obligations
and the structure of this transaction is a common one, and the level
of complexity is similar to that of other JFC SME CLOs.
Moody's V scores provide a relative assessment of the quality of available
credit information and the potential variability of various inputs in
a rating determination. The V score ranks transactions by the potential
for significant rating changes owing to uncertainty about the assumptions
due to data quality, historical performance, the level of
disclosure, transaction complexity, modeling, and the
transaction governance that underlie the ratings. V scores apply
to the entire transaction, not to individual tranches.
If the transaction default rate used in determining the initial rating
were changed to 4.0% or 5.0%, the model
output for the Class A would not change. However, the model
output for Class B and Class C would change from Baa2 to Baa3 or Ba2(Class
B); from Caa2 to Ca or Ca (Class C), respectively (the "parameter
sensitivities").
Parameter sensitivities are not intended to measure how the rating of
the security might migrate over time; rather, they are designed
to provide a quantitative calculation of how the initial rating might
change if key input parameters used in the initial rating process differed.
The analysis assumes that the deal has not aged, and does not factor
structural features such as sequential payment effect. Parameter
sensitivities reflect only the ratings impact of each scenario from a
quantitative/model-indicated standpoint. Qualitative factors
are also taken into consideration in the ratings process, so the
actual ratings that would be assigned in each case could vary from the
information presented in the parameter sensitivity analysis.
The methodology, "Updated Report on V Scores and Parameter
Sensitivities for Structured Finance Securities," published
on September 30, 2010, is available on www.moodys.co.jp.
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.
REGULATORY DISCLOSURES
For an explanation of the (sf) indicator, please see "Moody's
Structured Finance Rating Scale" on www.moodys.com.
The principal information used to prepare the credit rating comprised
historical data, attribution data, and contracts.
Information sources used to prepare the credit rating are the following
parties involved in the ratings (JFC, the Arranger, etc.);
public information; and confidential and proprietary Moody's
information.
Measures taken to ensure the quality of this information include representations
and warranties.
Moody's considers the quality of information available on the issuer
or obligation satisfactory for the purposes of assigning a credit rating.
Moody's encouraged rating-related entities to disclose any
information that may be pertinent to this transaction, including
items described in "Information Considered Important in Evaluating
the Appropriateness of a Credit Rating" on www.moodys.co.jp,
or to take other measures to enable third parties to verify the appropriateness
of the credit rating.
Rating-related entities have responded to us that they will disclose
related information pertinent to this transaction. The information
can be found on the website of rating-related entities.
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.
Credit ratings are Moody's current opinions of the relative future credit
risk of entities, credit commitments, or debt or debt-like
securities. Moody's defines credit risk as the risk that an entity
may not meet its contractual, financial obligations as they come
due and any estimated financial loss in the event of default. Credit
ratings do not address any other risk, including but not limited
to: liquidity risk, market value risk, or price volatility.
Credit ratings do not constitute investment or financial advice,
and credit ratings are not recommendations to purchase, sell,
or hold particular securities. No warranty, express or implied,
as to the accuracy, timeliness, completeness, merchantability
or fitness for any particular purpose of any such rating or other opinion
or information is given or made by Moody's in any form or manner whatsoever.
The credit risk of an issuer or its obligations is assessed based on information
received from the issuer or from public sources. Moody's may change
the rating when it deems necessary. Moody's may also withdraw the
rating due to insufficient information, or for other reasons.
Moody's Japan K.K. is a credit rating agency registered
with the Japan Financial Services Agency and its registration number is
FSA Commissioner (Ratings) No. 2. The Financial Services
Agency has not imposed any supervisory measures on Moody's Japan K.K.
in the past year.
Please see ratings tab on the issuer/entity page on the Moody's website
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 Credit 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 the Moody's website for further information.
Please see the Credit Policy page on the Moody's website for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Tokyo
Daisuke Kitazawa
Asst Vice President - Analyst
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Tokyo
Yusuke Seki
Senior Vice President - Team Leader
Structured Finance Group
Moody's Japan K.K.
JOURNALISTS: (03) 5408-4110
SUBSCRIBERS: (03) 5408-4100
Moody's Japan K.K.
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Tokyo 105-6220
Japan
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Moody's assigns provisional rating to Clover, LLC. referencing SME loans
