Approximately $128 million of outstanding asset-backed securities affected.
New York, December 23, 2010 -- Moody's Investors Service has downgraded the ratings of three series of
notes issued by A&K Funding LLC that are primarily collateralized
on a pari passu basis by a single pool of fee streams related to a pool
of bank-owned life insurance (BOLI) policies owned by a diverse
group of financial institutions as policyholders.
Complete rating actions are as follows:
Issuer: A&K Funding LLC
7.87% Commercial Asset Backed Notes, Series 2004-A,
Downgraded to Ca from B3, previously on December 30, 2009,
Downgraded to B3 and remain Under Review for further Possible Downgrade
7.39% Commercial Asset Backed Notes, Series 2005-A,
Downgraded to Ca from B3, previously on December 30, 2009,
Downgraded to B3 and remain Under Review for further Possible Downgrade
7.415 % Commercial Asset Backed Notes, Series 2006-A,
Downgraded to Ca from B3, previously on December 30, 2009,
Downgraded to B3 and remain Under Review for further Possible Downgrade
RATINGS RATIONALE
The notes were downgraded in December 2009 because of poor collateral
performance, and were left on review for possible further downgrade
to allow Moody's to evaluate the likelihood that cash flows from the policies
might recover to levels sufficient both to prevent a default on interest
and to afford ultimate repayment of principal. Termination of a
BOLI policy by a bank policyholder, whether by voluntary surrender
despite adverse tax consequences, or by involuntary surrender following
a default, results in the cessation of cash flows derived related
to that policy. Low interest rates reduce the crediting rate (analogous
to a reinvestment rate) that in turn also reduces cash flow from the pool.
The issuer has no control over these risks. The initial review
for downgrade in 2009 was triggered by the failure of a financial institution
which represented the largest exposure in the pool at that time.
This default, in combination with the low crediting rate in the
current interest rate environment, has resulted in cash flows substantially
lower than originally expected at closing.
The servicing reports have continued to indicate that current policy-derived
cash flow is insufficient to pay current accrued interest without also
drawing on the reserve account. At the current rate of withdrawal,
the reserve account will likely be exhausted in about one-and-one-half
to three years. By definition this leaves little or no monies to
amortize principal now or in future periods. While substantial
policy-derived cash flows are expected to continue for more than
twenty years, our analysis suggests that significantly better performance
than is anticipated by Moody's will be required in order for that cash
flow to be sufficient to repay principal. In particular,
according to our analysis it would take some combination of minimal voluntary
and involuntary surrender rates, very high renewal rates on non-MEC
policies (as described in principal methodology below), and crediting
rates far higher than the current interest rate environment permits,
in order for cash flows to reach levels necessary to retire substantial
amounts of principal. Moody's views this as unlikely.
Analect Administrative Services acts as the primary servicer. Wells
Fargo Bank, National Association acts as trustee and back up servicer.
Analect Administrative Services is a wholly-owned subsidiary of
Analect LLC, and at the time of the transactions' closing,
was one of the largest BOLI originators and servicers in the market.
The principal methodology used in rating these transactions is described
below. As the notes indicate a high probability of default,
Moody's also used "Moody's Approach to Rating Structured Finance Securities
in Default" rating methodology published in November 2009. As discussed
in that methodology, when a structured finance security is very
likely to default we will assign a rating on that security that reflects
the expected recovery of principal and interest, as well as the
uncertainty around that expectation.
PRINCIPAL METHODOLOGY
In rating the transaction Moody's used both qualitative and quantitative
analysis to analyze the sufficiency of the BOLI commission stream.
Qualitatively, Moody's analysis focused on the following key factors:
(i) the likelihood of policyholders surrendering their BOLI policies,
including adverse tax consequences triggered upon surrender; (ii)
continuation of the favorable tax treatment under federal tax law granted
to BOLI policy holders; (iii) concentration and financial stability
of policyholders related to the collateral pool; (iv) expected mortality
rates; (v) counterparty risk to Sun Life, as the sole policy
underwriter, for the collateral pool; (vi) possible Sun Life
setoff against the collateral if Analect U.S. defaults in
its servicing performance and the presence of a highly rated back-up
servicer; (vii) the likelihood that the BOLI policies' complied with
the law of insurable interest so that the policies status as property
of the issuer could not be successfully challenged by the BOLI policies'
underlying insurable employees; and (viii) regulatory oversight and
restrictions on BOLI investments. The policies include MEC and
non-MEC policies types. Non-MEC policies optionally
expire or renew with the payment of an additional premium, after
approximately seven (7) years. MEC policies are fully paid up for
life.
Quantitatively, Moody's estimates future Periodic Fee cashflows
based on available data concerning cash surrender values and current cash
inflows from the assets, as well as mortality rates and investment
returns. These cashflows were then used to pay down the bonds and
to observe the probability and severity of default under various scenarios.
Under the above mentioned methodologies, Moody's relied on both
a static and a simulation based framework to generate default and recovery
scenarios for the cash flow streams backing the notes.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Rating Methodologies sub-directory
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 six months.
ADDITIONAL RESEARCH
Press releases for the above transactions are available on moodys.com.
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
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service 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
Everett Rutan
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Jiang Xu
Asst Vice President - 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 downgrades BOLI-related ABS notes issued by A&K Funding LLC
