Approximately USD 219.3 million of debt securities affected
New York, January 07, 2011 -- Moody's Investors Service announced today that it has downgraded the ratings
on the following notes issued by TROPIC CDO IV LTD.
U.S. $160,000,000 Class A-1L Floating
Rate Notes Due April 2035 (current balance of $140,968,376),
Downgraded to B3 (sf); previously on November 2, 2009 Ba1 (sf)
Placed Under Review for Possible Downgrade;
U.S. $40,000,000 Class A-2L Floating
Rate Notes Due April 2035 (current balance of $40,000,000),
Downgraded to Caa2 (sf); previously on November 2, 2009 B1
(sf) Placed Under Review for Possible Downgrade;
U.S. $37,500,000 Class A-3L Deferrable
Floating Rate Notes Due April 2035 (current balance of $38,364,928),
Downgraded to C (sf); previously on November 2, 2009 Ca (sf)
Placed Under Review for Possible Downgrade.
According to Moody's, the rating actions taken today are primarily
the result of an increase in the assumed defaulted amount in the underlying
portfolio. The assumed defaulted amount increased by $43M
since the last rating action in October 2009. Cumulative assumed
defaults now total $156 million (49.7% of the current
portfolio). All the assumed defaulted assets are carried at zero
recovery in our analysis. The remaining assets in the portfolio
have also shown a slight deterioration, as indicated by a WARF increase
to 2148, from 1798 as of the last rating action date. Currently,
59% of the portfolio is estimated to be Ba1 or below, as
determined both by using FDIC Q3-2010 financial data in conjunction
with Moody's RiskCalc model to assess non-publicly rated bank trust
The par loss due to the increase in the assumed defaulted amount has resulted
in loss of overcollateralization for the tranches affected and an increase
of their expected losses since the last rating action. As of the
latest trustee report dated October 14, 2010, the Senior Overcollateralization
Ratio is 98.63% (limit 140.00%), the
Class A-3 Overcollateralization Ratio is 81.70% (limit
112.00%) and the Class B Overcollateralization Ratio is
59.61% (limit 103.00%),versus trustee
reported levels from the report dated October 7, 2009 of 123.79%,
103.80 and 76.95% respectively, which were
used during the last rating action.
TROPIC CDO IV LTD., issued on November 18, 2004,
is a collateral debt obligation backed by a portfolio of bank trust preferred
securities (the 'TRUP CDO'). On October 20, 2009, the
last rating action date, Moody's downgraded five classes of notes,
which were the result of the application of revised and updated key modeling
assumptions, as well as the deterioration in the credit quality
of the transaction's underlying portfolio. On November 2,
2009, Moody's placed the Class A-1L, A-2L
and A-3L Notes under review for possible downgrade due to the acceptance
of the offer by a third party (the "Third Party") to buy certain
securities from the transaction portfolio, as per the Trustee notice
dated as of October 30, 2009. On November 2, 2009,
the Trustee filed an Interpleader Complaint (the "Interpleader Action")
in the United States District Court for the Southern District of New York
(the "Court") requesting a judicial determination regarding
how to proceed with the Third Party's offer.
Moody's rating action also takes into account recent developments
with regards to the Interpleader Action. Moody's received
a notice from the trustee, dated as of December 23, 2010,
stating the Trustee has received a copy of the letter to the Court from
the Third Party's counsel. According to the Trustee notice,
the Third Party has withdrawn its offer to buy back the securities from
the transaction portfolio.
The credit deterioration exhibited by these portfolios is a reflection
of the continued pressure in the banking sector as the number of bank
failures and interest deferrals of trust preferred securities issued by
banks has continued to increase. In Moody's opinion, the
banking sector outlook continues to remain negative.
The portfolio of this CDO is mainly composed of trust preferred securities
issued by small to medium sized U.S. community banks that
are generally not publicly rated by Moody's. To evaluate their
credit quality, Moody's derives credit scores for these non-publicly
rated assets and evaluates the sensitivity of the rated transactions to
their volatility, as described in Moody's Rating Methodology "Updated
Approach to the Usage of Credit Estimates in Rated Transactions",
October 2009. The effect of the stress testing of these credit
scores varies between one and three notches, depending on the total
amount and relative size of these securities in the collateral pool.
Moody's evaluation of this transaction relies on financial data received
for a majority of bank obligors in the pool as of Q3-2010.
This financial data is used by Moody's to assess the credit quality of
bank obligors in the pool, relying on RiskCalc, an econometric
model developed by Moody's KMV. The results obtained from the RiskCalc
model have been translated to Moody's rating scale and adjusted by one
notch where necessary in order to compensate for the absence of credit
indicators such as rating reviews, outlooks and adjustments factoring
in cyclical developments in the economy.
Moody's performed a number of sensitivity analyses of the results to some
of the key factors driving the ratings. The sensitivity of the
model results to changes in the WARF (representing a slight improvement
and a slight deterioration of the credit quality of the collateral pool)
was examined. If WARF is increased by 50 points from the base case
of 2148, the model results in an expected loss that is one notch
worse than the result of the base case for Class A-1L. If
the WARF is decreased by 600 points, expected losses are one notch
better than the base case results.
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
Moody's considers as well the structural protections in each transaction,
the risk of triggering an Event of Default, the recent deal performance
in the current market conditions, the legal environment, and
specific documentation features. 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.
The principal methodologies used in rating TROPIC CDO IV LTD. were
"Moody's Approach to Rating U.S. Bank Trust Preferred Security
CDOs" published in June 2010, and "Updated Approach to the Usage
of Credit Estimates in Rated Transactions" published in October 2009.
Due to the impact of revised and updated key assumptions referenced in
these rating methodologies, key model inputs used by Moody's in
its analysis, such as par, weighted average rating factor,
Moody's Asset Correlation, and weighted average recovery rate,
may be different from the trustee'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".
The transaction's portfolio was modeled, according to our rating
approach, using CDOROM v.2.6 to develop the default
distribution from which the Moody's Asset Correlation parameter was obtained.
This parameter was then used as an input in a cash flow model using CDOEdge.
CDOROM v.2.6 is available on moodys.com under Products
and Solutions -- Analytical models, upon return of
a signed free license agreement.
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.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our web site, at www.moodys.com/SFQuickCheck.
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.
Structured Finance Group
Moody's Investors Service
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades TRUP CDO notes issued by TROPIC CDO IV LTD.
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