Approximately $128.6 million of outstanding asset-backed securities affected.
New York, December 30, 2009 -- Moody's Investors Service has downgraded the ratings of three series of
notes issued by A&K Funding LLC that are primarily collateralized
on a pari passu basis by a single pool of insurance commission-related
fee streams related to a pool of bank-owned life insurance (BOLI)
policies. The ratings remain on review for further possible downgrade.
Complete rating actions are as follows:
Issuer: A&K Funding LLC
7.87% Commercial Asset Backed Notes, Series 2004-A,
Downgraded to B3 from A3 and remain Under Review for further Possible
Downgrade, previously on August 13, 2009, A3 Placed
under Review for Possible Downgrade
7.39% Commercial Asset Backed Notes, Series 2005-A,
Downgraded to B3 from A3 and remain Under Review for further Possible
Downgrade, previously on August 13, 2009, A3 Placed
under Review for Possible Downgrade
7.415 % Commercial Asset Backed Notes, Series 2006-A,
Downgraded to B3 from A3 and remain Under Review for further Possible
Downgrade, previously on August 13, 2009, A3 Placed
under Review for Possible Downgrade
RATIONALE
The issuer has no control over any policyholder's decision to surrender
its BOLI policies. If the policies are surrendered, the securitized
fee streams relating to those policies cease.
The notes were placed under review for possible downgrade to allow Moody's
to evaluate whether, in the current highly challenging environment
for financial institutions, the motivations of the policyholders
and their financial stability are consistent with assuming a low likelihood
for surrender. Further to this concern, the successor to
the financial institution representing the largest single exposure in
the collateral pool for the notes has surrendered its policies causing
a sharp decline in available cash flow. Current servicing reports
indicate that current policy-derived cash flow is insufficient
to pay current accrued interest without drawing on the reserve account.
At current rates the reserve account will likely be exhausted in three
to four years. While substantial policy-derived cash flows
are expected to continue for more than twenty years, our analysis
suggests that absent significantly better performance than is anticipated
by Moody's will be required in order for that cash flow to be sufficient
to repay any principal. The B3 rating reflects the long-tail
nature of the remaining expected cash flows as well as some remaining
uncertainty as to the potential for upside in collateral performance,
which could boost the potential for repayment of principal.
REVIEW WILL CONTINUE
During the continuing review period we will refine our analysis.
In particular we will focus on refining our analysis of the potential
for repayment of principal, the potential for upside in collateral
performance particularly should renewals of certain policies occur,
and the degree to which aggregate post-default cash flows expected
to be received over many years can credited as recovery.
COLLATERAL AND TRANSACTION STRUCTURE
The collateral securing the notes includes the right to receive payment
of (i) certain "servicing fees" arising from, or in connection with
services to be provided by Analect Administrative Services LLC,
a Delaware limited liability company ("Analect U.S."),
and (ii) certain "reinsurance receivables" arising from, or in obligation
assumed by Analect Re (Bermuda) Limited, a Bermuda long-term
insurance company ("Analect Bermuda"), over a defined period of
approximately 30 years from issuance. The servicing fees and reinsurance
receivables (together the "Periodic Fees") relate to certain life insurance
policies sold by Sun Life Assurance Company of Canada ( U.S.)
(Sun Life) to financial institutions in the U.S.
The policies consist of BOLI policies purchased and owned by various financial
and other institutions, on the lives of its employees (typically
its directors, executives, management and key employees).
Sun Life (Aa3, with a negative outlook), pays the Periodic
Fees as they arise to the issuer. The amount and duration of the
Periodic Fee payments to the issuer depend primarily on (i) the projected
earnings on the cash surrender value of the policies, (ii) mortality
and (iii) surrender of the policies. Of these three factors,
surrender is the most critical since surrender eliminates the portion
of the Periodic Fee Stream associated with the surrendered policy.
Certain of the policies contain renewal clauses upon payment of additional
premia. We have viewed the likelihood of such renewals as very
low.
The notes were sized at closing based on only the initial thirteen years
of projected Periodic Fee payments. Credit enhancement was effected
due to the inclusion of a full thirty years of Periodic Fee payments in
the collateral, with a corresponding 30-year legal final
maturity. Therefore if cash flow was not sufficient to fully amortize
the notes over thirteen years, additional cash flow in later years
would be available to complete repayment. After payment of servicing
fees and other transaction expenses, all cash flow received is applied
first to accrued interest and then the remainder is applied as principal
to repay the notes.
SERVICING AND ADMINISTRATION
Analect U.S. acts as the primary servicer. Wells
Fargo Bank, National Association acts as trustee and back up servicer.
Analect U.S., formed on November 18, 1999 is
a wholly-owned subsidiary of Analect LLC, and at the time
of the transactions' closing, was one of the largest BOLI originators
and servicers in the market. Analect U.S.'s principal
executive offices are located Great Neck, NY.
RATING METHODOLOGY
In rating the transaction Moody's used both qualitative and quantitative
analysis. Qualitatively, Moody's analysis focused on the
following key factors: (i) the likelihood of policyholders surrendering
their BOLI policies, including adverse tax consequences triggered
upon surrender; (ii) continuation of the favorable tax treatment
under federal tax law granted to BOLI policy holders; (iii) concentration
and financial stability of policyholders related to the collateral pool;
(iv) expected mortality rates; (v) counterparty risk to Sun Life,
as the sole policy underwriter, for the collateral pool; (vi)
possible Sun Life setoff against the collateral if Analect U.S.
defaults in its servicing performance and the presence of a highly rated
back-up servicer; (vii) the likelihood that the BOLI policies'
complied with the law of insurable interest so that the policies status
as property of the issuer could not be successfully challenged by the
BOLI policies' underlying insurable employees; and (viii) regulatory
oversight and restrictions on BOLI investments.
Quantitatively, Moody's estimates future Periodic Fee cashflows
based on available data concerning cash surrender values and current cash
inflows from the assets, as well as mortality rates and investment
returns. These cashflows were then used to pay down the bonds and
to observe the probability and severity of default under various scenarios.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Rating Methodologies sub-directory
on Moody's website. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
New York
Mark DiRienz
Managing Director
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades and reviews for further downgrade, insurance commission notes issued by A&K Funding LLC
