London, 20 December 2011 -- Moody's Investors Service announced today that it has downgraded the rating
of the following Credit Default Swap entered into by Merrill Lynch International,
a transaction referencing a static portfolio of corporate entities:
Issuer: Merrill Lynch International Credit Default Swaps (Shamrock)
....EUR 50,000,000 Shamrock Class
1 (Reference N° 06ML19662A) Notes, Downgraded to Caa3 (sf);
previously on Aug 24, 2010 Downgraded to Ba1 (sf)
Merrill Lynch International CDS (Shamrock), issued in April 2006,
is a credit default swap referencing a portfolio of senior unsecured,
subordinated and preferred stock.
RATINGS RATIONALE
Moody's explained that the rating action taken today is the result of
the overall credit deterioration of the portfolio. Since inception,
the subordination of the rated tranche has been reduced due to credit
events. Since the last rating action, there have been six
credit events on, among others, Bank of Scotland Plc and The
Royal Bank of Scotland Plc in respect to the preferred stock. The
rest, Ambac Financial Group Inc and Allied Irish Banks, plc,
Bank of Ireland and Irish Life & Permanent plc were in respect to
the subordinate debt. The notes have a remaining life of 4.27
years and credit enhancement of approximately 0.43%.
The Banking, Insurance and Finance sectors are the most represented,
weighting 79.69%, 12.5%, and 4.7%,
respectively, of the portfolio initial notional.
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Corporate Collateralized 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".
In its base case Moody's ran the CDORom (as described below) using
the senior unsecured rating for all the exposures in the portfolio and
specifying senior unsecured or subordinated seniorities depending on the
type of exposure. The preferred stock exposures were run with the
senior unsecured rating, 0% recovery rate and 100%
DP stress.
In the process of determining the final rating, Moody's took into
account the results of a number of sensitivity analyses:
(1) Use of subordinated ratings-- Moody's tested the deal sensitivity
to the actual ratings of the subordinated debt exposures as they constitute
approximately 64% of the current reference portfolio. This
run generated a result that was 3 notches lower than the one modelled
under the base case.
(2) Use of preferred stock ratings - Including consideration of
a variability of recovery rates of preferred stock which constitute approximately
15% of the current reference portfolio. Moody's reviewed
model outputs that included referencing the actual ratings of the preferred
stocks as well as stressing the senior unsecured rating default probabilities
and recoveries. These runs generated results that one notch lower
than those modelled under the base case.
Taking into consideration the result of these sensitivity analyses the
rating committee vote resulted in a downgrade of the tranche's rating
to a level three notches lower than the base case result.
Today's action also reflects the correction of a numerical input
with respect to the credit enhancement amount used in previous rating
actions. In previous actions, Moody's input a lower
subordination than was the case. Had this not occurred, the
rating of the notes may have been downgraded by a further notch today.
The correct input is now included in the rating of the notes.
Moody's notes that this transaction is subject to a high level of
macroeconomic uncertainty, which could negatively impact the ratings
of the notes, as evidenced by uncertainties of credit conditions
in the general economy especially as 15% of the portfolio is exposed
to obligors located in Portugal, Spain and Italy. CSO notes'
performance may also be impacted either positively or negatively by 1)
variations over time in default rates for instruments with a given rating,
2) variations in recovery rates for instruments with particular seniority/security
characteristics, 3) uncertainty about the default and recovery correlations
characteristics of the reference pool and 4) divergence in legal interpretation
of CDO documentation by different transactional parties due to embedded
ambiguities. Given the tranched nature of Corporate CSO liabilities,
rating transitions in the reference pool may have leveraged rating implications
for the ratings of the Corporate 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 principal methodology used in this rating was "Moody's Approach
to Rating Corporate Collateralized Synthetic Obligations" published
in September 2009. Please see the Credit Policy page on www.moodys.com
for a copy of this methodology.
In rating this transaction, Moody's used CDOROM to model the cash
flows and determine the loss for each tranche. The Moody's
CDOROM™ is a Monte Carlo simulation which takes the Moody's
default probabilities as input. Each corporate reference entity
is modelled individually with a standard multi-factor model incorporating
intra- and inter-industry correlation. The correlation
structure is based on a Gaussian copula. In each Monte Carlo scenario,
defaults are simulated. Losses on the portfolio are then derived,
and allocated to the notes in reverse order of priority to derive the
loss on the notes issued by the Issuer. By repeating this process
and averaging over the number of simulations, an estimate of the
expected loss borne by the notes is derived. As such, Moody's
analysis encompasses the assessment of stressed scenarios
In addition to the quantitative factors that are explicitly modelled,
qualitative factors are part of the 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, specific documentation features, the collateral
manager's track record, and the potential for selection bias in
the portfolio. 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.
REGULATORY DISCLOSURES
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.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
Information sources used to prepare the rating are the following:
parties involved in the ratings and public 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.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
two years preceding the credit rating action. Please see the special
report "Ancillary or other permissible services provided to entities
rated by MIS's EU credit rating agencies" on the ratings disclosure
page on our website www.moodys.com for further information.
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.
Mariona Serrat
Associate Analyst
Structured Finance Group
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
Neelam S. Desai
Senior Vice President
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
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 50m CSO notes of Shamrock Credit Default Swap
