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Rating Action:

Moody's downgrades TRUP CDOs exposed to REITs

09 Apr 2009

62 tranches affected across 13 Trust Preferred CDOs

New York, April 09, 2009 -- Moody's has downgraded 62 tranches across 13 Trust Preferred ("TRUP") CDOs. The downgrades are prompted by the exposure of these TRUP CDOs to trust preferred or subordinated debt issued by real estate investment trusts ("REITs"), real estate operating companies, homebuilders, commercial mortgage backed securities, and real estate related loans.

In April 2008, Moody's downgraded most REIT TRUP CDO tranches due to the increasing likelihood of defaults and low expected recoveries for mortgage REITs and homebuilders. Due to the continued credit crisis and weak economic conditions, defaults and interest payment deferrals for all collateral types backing REIT CDOs are expected to be worse than previously anticipated. Moody's believes the weak economic environment will continue throughout this year resulting in more defaults and low recoveries in this area.

Today's rating actions are the result of using a combination of the following analysis: (1) Cash-flow modeling analysis (2) Coverage analysis (3) Event of default analysis (4) Break-even analysis.

Cash Flow Modeling Analysis

Moody's looked at two scenarios from its cash flow model using the correlated binomial distribution. The major inputs into the cash flow model are the default probability, correlations, and recovery rates.

In the first scenario, Moody's assumed any security currently defaulted, deferring payment, or with a rating of less than Caa2 to be defaulted with a zero recovery. In the second scenario, Moody's assumed any security currently defaulted, deferring payment, with a rating of less than Caa1, or a market capitalization less than $50 million to be defaulted with a zero recovery. These assumed defaults were removed from the total collateral par amount used to run the cash flow models.

Moody's public ratings of the underlying securities were used as the basis for determining which securities in each scenario would be assumed to be defaulted as well as for calculating the default probability of the performing collateral. The default probability of the performing collateral was calculated by taking its weighted average rating factor ("WARF") and extrapolating the corresponding default probability from Moody's idealized default probability table based on the weighted average life of the collateral portfolio. The ratings used for the analysis were also adjusted one notch downward for a negative outlook and two notches downward for review for possible downgrade. For unrated REIT securities, Moody's assumed these names had an implied rating of B3 which is at the lowest range of the financial measures used to asses these credits. The financial measures are further described in Moody's Approach to Rating U.S. REIT CDOs, April 4, 2006 ("Methodology Paper"). Moody's previously assumed many of these unrated names had implied ratings of B1 or B2.

Moody's calculated a correlation using MOODY'S CDOROMv2.5™ which splits REITs into eight classifications. Moody's further stressed the correlations because each of these CDOs is completely backed by real estate related securities, which have proven to be more highly interdependent during this cycle.

Moody's assumed a 10% recovery rate for all collateral types in REIT TRUP CDOs. Most of this collateral is either subordinated debt or trust preferred securities.

Among the various model parameters, the assumed defaulted par had the greatest impact on ratings. Other than the assumptions noted above, the cash flow model also used the approach outlined in the Methodology Paper.

Coverage Analysis

For each rated tranche, Moody's calculated coverage ratios using the par amounts from the two cash flow modeling scenarios. The coverage ratio was calculated as the performing collateral par over the par amounts of the tranche being evaluated and all tranches senior and pari passu to such tranche. The performing collateral excluded all assumed defaults as described above as well as the default probability adjusted par. The default probability adjusted par was calculated by multiplying the pool default probability by the performing collateral. To achieve an investment grade rating on a super senior tranche, the coverage ratio using the assumed defaults from the second scenario was expected to be above 100%.

Event of Default analysis

To date, there are no Moody's rated REIT TRUP CDOs that have declared an Event of Default ("EOD"). The most likely reason for a REIT TRUP CDO to trigger an EOD is non-payment of interest on a non-deferrable tranche or a senior coverage test generally falling below 100% caused by a sufficient number of defaults or deferral of interest on the underlying securities. In the event of an EOD, most REIT TRUP CDOs allow the controlling class, generally the super senior tranche, the right to accelerate cash flows or liquidate the collateral portfolio. For these rating actions, Moody's assumed liquidation would not result if EOD occurs because much of the underlying collateral does not have an active market making it difficult to sell the portfolio. Instead, if EOD occurs, Moody's assumed the controlling class would rather elect to accelerate cash flows from the underlying performing securities.

There are uncertainties with EOD and although no tranches remain on review for possible downgrade, further downgrades may be warranted if an EOD is triggered within any REIT TRUP CDO.

Break-even analysis

Moody's also looked at scenarios to see how many underlying securities would have to default before a loss is realized on a tranche. This analysis was mainly used as a supplement to the other methods in determining the sufficiency of the current subordination at each assigned rating.

In order to promote market transparency, Moody's encourages the underwriters and collateral managers for all TRUP CDOs to publish the list of collateral securities in each of their respective CDOs.

Attentus CDO I, Ltd.

First Scenario WARF: 2,903

First Scenario Assumed Defaulted Amount: $128,704,886

Second Scenario WARF: 2,704

Second Scenario Assumed Defaulted Amount: $ 172,654,886

Class A-1, Downgraded to B1; previously on 4/24/2008 downgraded to Aa1

Class A-2, Downgraded to Caa2; previously on 4/24/2008 downgraded to A2

Class B, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba1

Class C-1, Downgraded to Ca; previously on 4/24/2008 downgraded to B3

Attentus CDO II, Ltd.

First Scenario WARF: 2,661

First Scenario Assumed Defaulted Amount: $152,252,500

Second Scenario WARF: 2,264

Second Scenario Assumed Defaulted Amount: $196,702,500

U.S.$235,000,000 Class A-1 First Priority Senior Secured Floating Rate Notes Due 2041, Downgraded to Ba2; previously on 4/24/2008 downgraded to Aa1

U.S.$60,000,000 Class A-2 Second Priority Senior Secured Floating Rate Notes Due 2041, Downgraded to B3; previously on 4/24/2008 downgraded to Aa3

U.S.$55,000,000 Class A-3A Third Priority Senior Secured Floating Rate Notes Due 2041, Downgraded to Caa2; previously on 4/24/2008 downgraded to A1

U.S.$5,000,000 Class A-3B Third Priority Senior Secured Floating Rate Notes Due 2041, Downgraded to Caa2; previously on 4/24/2008 downgraded to A1

U.S.$20,000,000 Class B Fourth Priority Deferrable Secured Floating Rate Notes Due 2041, Downgraded to C; previously on 4/24/2008 downgraded to Ba3

U.S.$32,000,000 Class C Fifth Priority Deferrable Secured Floating Rate Notes Due 2041, Downgraded to C; previously on 4/24/2008 downgraded to Caa3

Attentus CDO III, Ltd.

First Scenario WARF: 2,909

First Scenario Assumed Defaulted Amount: $ 97,355,538

Second Scenario WARF: 2,483

Second Scenario Assumed Defaulted Amount: $ 174,055,538

U.S.$150,000,000 Class A-1A First Priority Delayed Draw Senior Secured Floating Rate Notes Due 2042, Downgraded to Baa2; previously on 1/26/2007 assigned Aaa

U.S.$100,000,000 Class A-1B Second Priority Senior Secured Floating Rate Notes Due 2042, Downgraded to B2; previously on 4/24/2008 downgraded to Aa1

U.S.$100,000,000 Class A-2 Third Priority Senior Secured Floating Rate Notes Due 2042, Downgraded to Caa2; previously on 4/24/2008 downgraded to Aa3

U.S.$34,000,000 Class B Fourth Priority Deferrable Secured Floating Rate Notes Due 2042, Downgraded to Ca; previously on 4/24/2008 downgraded to Baa1

U.S.$16,000,000 Class C-1 Fifth Priority Deferrable Secured Floating Rate Notes Due 2042, Downgraded to C; previously on 4/24/2008 downgraded to Ba1

U.S.$15,000,000 Class C-2 Fifth Priority Deferrable Secured Fixed/Floating Rate Notes Due 2042, Downgraded to C; previously on 4/24/2008 downgraded to Ba1

Kodiak CDO I, Ltd.

First Scenario WARF: 3,226

First Scenario Assumed Defaulted Amount: $124,031,250

Second Scenario WARF: 2,681

Second Scenario Assumed Defaulted Amount: $292,781,250

U.S.$338,500,000 Class A-1 First Priority Senior Secured Floating Rate Notes Due 2037, Downgraded to Ba3; previously on 4/24/2008 downgraded to Aa1

U.S.$103,500,000 Class A-2 Second Priority Senior Secured Floating Rate Notes Due 2037, Downgraded to Ca; previously on 4/24/2008 downgraded to Aa3

U.S.$83,000,000 Class B Third Priority Senior Secured Floating Rate Notes Due 2037, Downgraded to Ca; previously on 4/24/2008 downgraded to Aa3

U.S.$30,000,000 Class C Fourth Priority Secured Deferrable Floating Rate Notes Due 2037, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba1

Kodiak CDO II, Ltd.

First Scenario WARF: 3,148

First Scenario Assumed Defaulted Amount: $35,250,000

Second Scenario WARF: 2,948

Second Scenario Assumed Defaulted Amount: $219,250,000

U.S. $338,000,000 Class A-1 Senior Secured Floating Rate Notes Due 2042, Downgraded to Ba1; previously on 6/29/2007 assigned Aaa

U.S. $53,000,000 Class A-2 Senior Secured Floating Rate Notes Due 2042, Downgraded to Caa1; previously on 6/29/2007 assigned Aaa

U.S. $80,000,000 Class A-3 Senior Secured Floating Rate Notes Due 2042, Downgraded to Caa3; previously on 6/29/2007 assigned Aaa

U.S. $81,000,000 Class B-1 Senior Secured Floating Rate Notes Due 2042, Downgraded to Ca; previously on 6/29/2007 assigned Aa1

U.S. $5,000,000 Class B-2 Senior Secured Fixed/Floating Rate Notes Due 2042, Downgraded to Ca; previously on 6/29/2007 assigned Aa1

TABERNA PREFERRED FUNDING II, LTD.

First Scenario WARF: 2,679

First Scenario Assumed Defaulted Amount: $380,625,000

Second Scenario WARF: 2,496

Second Scenario Assumed Defaulted Amount: $ 488,057,000

Class A-1a, Downgraded to B2; previously on 4/24/2008 downgraded to A3, on review for possible downgrade

Class A-1b, Downgraded to B2; previously on 4/24/2008 downgraded to A3, on review for possible downgrade

Class A-1c, Downgraded to B2; previously on 4/24/2008 downgraded to A3, on review for possible downgrade

Class B, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba3, under review for possible downgrade

Taberna Preferred Funding III, Ltd.

First Scenario WARF: 2,130

First Scenario Assumed Defaulted Amount: $189,530,000

Second Scenario WARF: 2,245

Second Scenario Assumed Defaulted Amount: $286,955,000

Class A-1a, Downgraded to Ba1; previously on 4/24/2008 downgraded to Aa2

Class A-1b, Downgraded to Ba1; previously on 4/24/2008 downgraded to Aa2

Class A-1c, Downgraded to Ba1; previously on 4/24/2008 downgraded to Aa2

Class A-2a, Downgraded to B3; previously on 4/24/2008 downgraded to A2

Class B-1, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba1

Class B-2, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba1

TABERNA PREFERRED FUNDING IV, LTD.

First Scenario WARF: 2,134

First Scenario Assumed Defaulted Amount: $145,625,000

Second Scenario WARF: 1,940

Second Scenario Assumed Defaulted Amount: $262,559,000

Class A-1, Downgraded to Ba1; previously on 4/24/2008 downgraded to Aa1

Class B-1, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba1

Class B-2, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba1

TABERNA PREFERRED FUNDING V, LTD.

First Scenario WARF: 3,088

First Scenario Assumed Defaulted Amount: $207,031,250

Second Scenario WARF: 2,726

Second Scenario Assumed Defaulted Amount: $345,240,250

U.S.$100,000,000 Class A-1LA Floating Rate Notes Due August 2036, Downgraded to B2; previously on 4/24/2008 downgraded to Aa1

U.S.$250,000,000 Class A-1LAD Delayed Draw Floating Rate Notes Due August 2036, Downgraded to B2; previously on 4/24/2008 downgraded to Aa1

U.S.$60,000,000 Class A-1LB Floating Rate Notes Due August 2036, Downgraded to Ca; previously on 4/24/2008 downgraded to Aa3

U.S.$90,000,000 Class A-2L Deferrable Floating Rate Notes Due August 2036, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba2

Taberna Preferred Funding VI, Ltd.

First Scenario WARF: 2,779

First Scenario Assumed Defaulted Amount: $166,875,000

Second Scenario WARF: 2,415

Second Scenario Assumed Defaulted Amount: $ 267,500,000

Class A-1A, Downgraded to Ba2; previously on 4/24/2008 downgraded to Aa1

Class A-1B, Downgraded to Ba2; previously on 4/24/2008 downgraded to Aa1

Class A-2, Downgraded to Caa2; previously on 4/24/2008 downgraded to Aa3

Class B, Downgraded to Ca; previously on 4/24/2008 downgraded to Baa3

Class C, Downgraded to Ca; previously on 4/24/2008 downgraded to B1

Taberna Preferred Funding VII, Ltd.

First Scenario WARF: 2,971

First Scenario Assumed Defaulted Amount: $134,218,750

Second Scenario WARF: 2,653

Second Scenario Assumed Defaulted Amount: $ 234,218,750

U.S.$350,000,000 Class A-1LA Floating Rate Notes Due February 2037, Downgraded to Ba2; previously on 4/24/2008 downgraded to Aa1

U.S.$120,000,000 Class A-1LB Floating Rate Notes Due February 2037, Downgraded to B2; previously on 4/24/2008 downgraded to Aa3

U.S.$25,000,000 Class A-2LA Floating Rate Notes Due February 2037, Downgraded to Caa3; previously on 4/24/2008 downgraded to A2

U.S.$50,000,000 Class A-2LB Deferrable Floating Rate Notes Due February 2037, Downgraded to Ca; previously on 4/24/2008 downgraded to Ba2

Taberna Preferred Funding VIII, Ltd.

First Scenario WARF: 3,098

First Scenario Assumed Defaulted Amount: $ 25,000,000

Second Scenario WARF: 2,920

Second Scenario Assumed Defaulted Amount: $ 107,538,447

U.S.$160,000,000 Class A-1A First Priority Delayed Draw Senior Secured Floating Rate Notes Due 2037, Downgraded to Ba1; previously on 7/2/2008 Aaa, under review for possible downgrade

U.S.$215,000,000 Class A-1B First Priority Senior Secured Floating Rate Notes Due 2037, Downgraded to Ba1; previously on 7/2/2008 Aaa, under review for possible downgrade

U.S.$120,000,000 Class A-2 Second Priority Senior Secured Floating Rate Notes Due 2037, Downgraded to Ba3; previously on 7/2/2008 Aaa, under review for possible downgrade

U.S.$75,000,000 Class B Deferrable Third Priority Secured Floating Rate Notes Due 2037, Downgraded to Ca; previously on 7/2/2008 Aa2, under review for possible downgrade

U.S.$40,000,000 Class C Deferrable Fourth Priority Secured Floating Rate Notes Due 2037, Downgraded to Ca; previously on 7/2/2008 A2, under review for possible downgrade

Taberna Preferred Funding IX, Ltd.

First Scenario WARF: 3,161

First Scenario Assumed Defaulted Amount: $ 50,000,000

Second Scenario WARF: 3,067

Second Scenario Assumed Defaulted Amount: $130,625,000

U.S. $275,000,000 Class A-1LA Floating Rate Notes Due May 2038, Downgraded to Ba1; previously on 6/29/2007 assigned Aaa

U.S. $100,000,000 Class A 1LAD Delayed Draw Floating Rate Notes Due May 2038, Downgraded to Ba1; previously on 6/29/2007 assigned Aaa

U.S. $116,000,000 Class A 1LB Floating Rate Notes Due May 2038, Downgraded to B1; previously on 6/29/2007 assigned Aaa

U.S. $25,000,000 Class A-2LA Floating Rate Notes Due May 2038, Downgraded to B3; previously on 6/29/2007 assigned Aa2

U.S. $53,000,000 Class A-2LB Deferrable Floating Rate Notes Due May 2038, Downgraded to Ca; previously on 7/2/2008 Aa3, under review for possible downgrade

U.S. $20,000,000 Class A-3LA Deferrable Floating Rate Notes Due May 2038, Downgraded to Ca; previously on 7/2/2008 A2, under review for possible downgrade

New York
Jian Hu
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Yasmine Mahdavi
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades TRUP CDOs exposed to REITs
No Related Data.
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