New York, December 17, 2010 -- Moody's has downgraded two lottery receivables asset backed note deals
sponsored and serviced by Western United Life Assurance Company (WULA,
unrated). The notes are each backed by cash flows from distinct
pools of specified lottery winnings from various state lotteries (lottery
receivables). The complete rating action is as follows:
Issuer: Western United Life Assurance Company - Lottery Receivable
Tekoa Certificate, Downgraded to Baa1 (sf); previously on Feb
26, 2007 Assigned A3 (sf)
Fernwood Certificate, Downgraded to Baa1 (sf); previously on
Feb 26, 2007 Assigned A2 (sf)
Today's rating actions are motivated primarily by changes in the ratings
of the states whose lottery commissions owe the securitized lottery receivables,
and solely in the case of Pennsylvania, the ratings of the responsible
annuity providers if an annuity provider was earmarked by that state's
lottery commission to pay the lottery receivables. To a lesser
extent, the rating actions are also the result from the shifting
concentration of the states and annuity providers represented in the remaining
pool over time, as the underlying lottery receivables have varying
tenors. The affected transactions, while collateralized by
pools with high-grade payors, have no enhancement for credit
The principal methodology used in these rating actions is described below.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found at www.moodys.com
in the Rating Methodologies sub-directory.
The collateral backing the notes consist of entitlements to lottery winnings
indirectly owned by the issuers. The issuers are Delaware business
trusts that hold 100% of the beneficial interest in certain other
grantor trusts that directly own lottery winnings entitlements that are
obligations of several state lottery commissions. Each receivable,
as required by the law of the relevant state, is transferred to
a grantor trust pursuant to a court order which details the payments assigned
and concludes that the transfer is in accordance with the relevant state
statute. We view this process as important because it provides
comfort that the transfer is valid. A relatively small percentage
of the receivables in these pools consist of lottery loans (loans made
to lottery winners secured by the lottery payments rather than sales of
the lottery winnings). While we view this type of receivable is
riskier due to potential exposure to a borrower's bankruptcy,
the low amount of exposure mitigates its impact on the rating.
The lottery receivables cash flows are not differentiated into principal
or interest. The balance of the notes when issued represented the
cumulative amount of cash flow scheduled to be received from the pooled
lottery receivable minus expected expenses, and all cash flow received
after expenses is applied as principal to pay down the notes. Moody's
rating addresses payment of the notes by their legal final maturity date.
The lottery commissions' payment obligations on the lottery receivables
are backed by monies that are set aside and invested by the commissions
pursuant to their investment guidelines as in effect from time to time.
However these monies does not secure the lottery receivables or the ABS
notes, they merely help assure the ability of the respective commissions
to honor their obligations. Further, such investment guidelines
may change through the ABS transaction's life.
To evaluate lottery receivables backed ABS, we use a weighted average
probability of default approach to determine the likelihood that the lottery
receivables will be paid, which equates to the likelihood of a default
on the notes where there is no overcollateralization or other credit enhancement.
The probability of default of the state lottery commission's payment
obligations in all cases except Pennsylvania, is estimated based
on its state's current rating, reduced by three notches to
account for (1) reductions in the financial strength of the states during
recessions during the transaction's life and (2) the fact that some
of the lottery commissions are not able to access general revenue of the
state but instead can only rely on the value of their state-granted
monopoly franchise to conduct the lottery.
In the case of Pennsylvania, accounts are backed either by annuities
acquired by the state lottery commission or, for lotteries receivables
arising dating prior to 1986, U.S. treasuries.
If a lottery receivable is expressly backed by treasury strips,
does the state lottery commission probability of default, estimated
as per the above procedure, serve as the default risk reference
point. Otherwise, the lottery receivables will have been
earmarked as obligations of specific annuity providers, so we reference
the probability of default of the annuity provider based on its insurance
financial strength rating, and lower this result by one notch to
provide a limited degree of de-linkage to the rated ABS.
After determining the estimated probability of default (or rating equivalent)
of each lottery receivable as above, we calculate the weighted average
probability of default (or rating equivalent) for the entire pool.
In the case of the an unrated or low rated servicer, we may further
notch down this calculated model output to account for operational risk
associated with the servicer's obligations to monitor the lottery
receivables payments and to properly apply such payments to the trusts,
resulting in a servicer-adjusted model output. In the case
of WULA-serviced transactions the reduction is two notches.
Lastly, in cases where there is no enhancement, such as the
WULA-sponsored transactions, the servicer adjusted model
output may be further adjusted downward as and if necessary so that it
is no more than three notches higher than the lowest rating of any state
or annuity provider associated with the securitized pool of lottery receivables.
This adjustment is performed because a default on any of the underlying
lottery receivables will result in a principal reduction on the ABS notes
given a lack of overcollateralization or other loss absorbing mechanism
to cover losses on the lottery receivables.
Moody's Investors Service did not 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.
The original press release for the above transactions is available on
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credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck.
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VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades Lottery Receivables ABS sponsored by Western United Life Assurance Company
250 Greenwich Street
New York, NY 10007