London, 17 December 2010 -- Moody's Investors Service announced today the following rating actions
on notes issued by Force Two Limited Partnership
Issuer: FORCE TWO Limited Partnership
EUR150.2M A Notes, Downgraded to A1 (sf); previously
on Oct 1, 2009 Downgraded to Aa1 (sf) and Remained On Review for
Possible Downgrade
EUR12.3M B Notes, Downgraded to Baa3 (sf); previously
on Oct 1, 2009 Downgraded to A1 (sf) and Remained On Review for
Possible Downgrade
EUR13M C Notes, Downgraded to Ba3 (sf); previously on Oct 1,
2009 Downgraded to Baa2 (sf) and Remained On Review for Possible Downgrade
EUR11.9M D Notes, Downgraded to B2 (sf); previously
on Oct 1, 2009 Downgraded to Ba1 (sf) and Remained On Review for
Possible Downgrade
EUR9.7M E Notes, Downgraded to Caa1 (sf); previously
on Oct 1, 2009 Downgraded to B1 (sf) and Remained On Review for
Possible Downgrade
RATINGS RATIONALE
Force Two is a German SME CLO referencing a static portfolio of German
profit participations ("Genussrechte") with a scheduled maturity of January
2014. Some of the 'Genussrechte' obligations in the portfolio have
certain features of equity including subordination and linkage of payments
to financial performance of the obligor such as interest deferral features
and contingent coupon components (type A obligations). Such obligations
can be written down depending on financial performance of the obligor
and may extend redemption beyond the legal final maturity of the transaction
which is 4 years after its scheduled maturity date. These obligations
make up 26.5% of the outstanding pool. Obligations
which have not redeemed at par plus accrued interest by the scheduled
maturity of the transaction will be extended up to the earlier of 13 years
and the date on which all payments due under the profit participation
agreement have been made. If such payments have not been made before
the legal maturity of the transaction in January 2018, this is likely
to lead to a loss for Force Two.
According to Moody's the rating actions are driven by 1) the revision
of IKB's internal rating scale and process used to assess the creditworthiness
of SME borrowers and 2) deterioration in the credit quality of the pool.
Force Two has experienced EUR 5 million of defaults since the last rating
action (October 2009) and is due to experience a distressed sale on a
further EUR 5 million before year end which will result in a 20%
cash recovery with potential for a further 20% in proceeds.
All previously unpaid interest from this issuer has now been repaid.
Not including this proposed sale, the principal deficiency ledger
(PDL) has been reduced from EUR 5.8 million at last rating action
to EUR 2.68 million in the latest investor report, dated
25 October 2010 .
In its base case, Moody's analyzed the underlying collateral pool
with a stressed weighted average default probability to scheduled maturity
(January 2014) of 17.7%. This is consistent with
the default probability level of a B2 rating. Moody's notes that
the transaction benefits from a material level of excess spread that has
allowed it to substantially cure the PDL and will continue to partially
mitigate the impact of potential new defaults.
In order to assess the default probabilities of each of the borrowers
in the pool, Moody's relies on the internal credit scores assigned
to each borrower by Equinotes Management GmbH, as Advisor to the
transaction, following the IKB rating process and methodology for
SME obligors. Following the recent revision by IKB of its internal
credit score scale, which provides a more detailed assessment of
credit risk levels, Moody's revisited its mapping to IKB credit
scores i.e. the way the bank's internal credit scores are
translated into Moody's idealized default probabilities. The greater
conservativeness embedded in IKB's revised credit scores drives IKB internal
ratings to map to higher Moody's default probabilities and therefore has
a negative impact on the ratings of the notes.
Moody's has changed its approach to stressing type A obligations.
At closing Moody's modelled the risk of such assets using a rating
migration approach that assessed the likelihood that debtors would default
on or defer fixed remunerations and/or principal payments. Instead,
Moody's now applies a haircut to the coupons and extends the expected
lives of such assets, with a severity reflecting the current rating
of each obligor.
Moody's also incorporated information provided by the manager in the latest
investor reports to account for more recent information on the performance
of the underlying obligors. Various additional scenarios have been
considered for the analysis and include the application of stresses applicable
to concentrated pools with non publicly rated issuers, as outlined
in Moody's Methodology, "Updated approach to the usage of credit
estimates in rated transactions" (October 2009).
The key assumptions Moody's used were the following:
1. Default rates for these pools will likely remain at elevated
levels, despite improvements in the German economy.
2. Recoveries on the subordinated loans may be close to zero in
the majority of cases, particularly when the issuer files for insolvency.
Moody's notes that this transaction is subject to a high level of macroeconomic
uncertainty, as evidenced by 1) uncertainties of credit conditions
in the general economy and 2) the ability of the underlying obligors to
refinance the subordinated bullet loans that make up the securitised pools.
Sources of additional performance uncertainties include:
1) Low portfolio granularity: The performance of the portfolio depends
to a large extent on the credit conditions of a few large obligors that
are rated non investment grade, especially when they experience
jump to default. Due to the pool's lack of granularity, Moody's
supplement its base case scenario with individual scenario analysis.
2) The additional risk presented by the interest deferral and principal
write-down features for some of the assets in the pool.
3) There is the potential for elevated refinancing difficulty regarding
the subordinated debt instruments in this portfolio, particularly
among obligors with weaker credit quality.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009,
"Moody's Approach to Rating Corporate Collateralized Synthetic Obligations"
published in September 2009, and "Moody's Approach to Rating CDOs
of SMEs in Europe" published in February 2007.
Under this methodology, Moody's relies on a simulation based framework.
Moody's therefore used CDOROMTM, to generate default and recovery
scenarios for each asset in the portfolio, and then Moody's EMEA
Cash-Flow model in order to compute the associated loss to each
tranche in the structure.
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.
REGULATORY DISCLOSURES
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
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 Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
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.
London
Greg O''Reilly
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paris
Florence Tadjeddine
VP - Senior Credit Officer
Structured Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades EUR 191 million of SME CLO notes of Force 2
