USD 135 million of debt certificates affected
New York, November 24, 2010 -- Moody's Investors Service announced today the following rating actions
on CDO Repackaging Trust Certificates Series 2004-(1 & 3),
collateralized debt obligation transactions ("Collateralized Synthetic
Obligations" or "CSOs").
Issuer: CDO Repackaging Trust Securities Series 2004-(1 &
....US$105M U.S. $105,000,000
CDO Repackaging Trust Certificates, Series 2004-3 (Class
I Certificates), Downgraded to Ba2 (sf); previously on Mar
27, 2009 Downgraded to Ba1 (sf)
....US$30M U.S. $30,000,000
CDO Repackaging Trust Securities, Series 2004-1 (Class III
Certificates) , Downgraded to Caa3 (sf); previously on Mar
27, 2009 Downgraded to Caa2 (sf)
The CSOs, issued in 2004, reference a portfolio of 22 asset-backed
securities and 15 "inner" CDOs exposed to portfolios of corporate
senior unsecured bonds.
Moody's explained that the rating actions taken today are the result of
the loss in subordination in the 15 inner CDOs due to credit events and
the overall deterioration of the credit quality of the reference portfolio.
The 10-year weighted average rating factor (WARF) of the 15 inner
CDOs and the 22 outstanding asset-backed securities ranges from
1067 to 1519, equivalent to Ba2 to Ba3 ratings, compared to
an average WARF of 900 to 960, equivalent to a Ba1 to Ba2 ratings,
in effect as of the last rating action. Moody's notes that
in the 15 inner corporate reference portfolios referencing a total universe
of 328 corporate obligations, 73 have an negative outlook,
16 have a positive outlook, six are on watch for possible downgrade
and three are on watch for possible upgrade.
The portfolio has experienced 11 credit events since closing of the transaction,
equivalent to losses ranging from 1.2% to 4.2%
for the 15 inner CDOs referencing corporate bonds. Since the last
rating action, Credit Events were triggered on Ambac Assurance Corporation,
CIT Group, Lear Corporation and Takefuji Corporation. In
addition, the portfolio is exposed to Clear Channel Communications,
Harrah's Entertainment Inc. and Texas Competitive Electric
Holdings, each of which are not the subject of a credit event,
but nonetheless are modeled by Moody's at Ca. The maturity
of the certificates is 3.7 years.
Moody's rating action today factors in a number of sensitivity analyses
and stress scenarios, discussed below. Results are given
in terms of the number of notches' difference versus the base case,
where higher notches correspond to lower expected losses, and vice-versa:
Time to maturity - The committee has reviewed the impact
of a scenario consisting of reducing the maturity by one year, keeping
all other things equal. Reducing the maturity of the transaction
generated a result that is one notch above the one modeled under the base
Market Implied Ratings ("MIRs") - The committee
took into account the result of a sensitivity analysis consisting of modeling
MIR in place of the corporate fundamental rating to derive the default
probability of each corporate name in the reference portfolio.
The gap between an MIR and a Moody's corporate fundamental rating is an
indicator of the extent of the divergence of credit view between Moody's
and the market on each referenced name in the CSO portfolio. The
result of this run is three notches below the one modeled under the base
Defaulting Caa names - A sensitivity analysis consisting
of defaulting all entities rated Caa1 and below was presented to the committee.
This run generated an expected loss that is four notches below the one
modeled under the base case.
Sector-wide weakening - A sensitivity analysis consisting
of notching down by one all the entities in the Banking, Finance,
Insurance and Real Estate sectors was also reviewed. This run generated
an expected loss that is two notches below the one modeled under the base
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
These qualitative factors include the structural protections in each transaction,
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 these transactions were "Moody's
Approach to Corporate Collateralized Synthetic Obligations" and "Moody's
Approach to Rating Structured Finance CDOs" published in September
2009 and March 2009, respectively. Other methodologies and
factors that may have been considered in the process of rating this issuer
can also be found on Moody's website. Moody's analysis for this
transaction is based on the CDOROM v2.6. This model 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.
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Corporate 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".
Moody's did not run a separate loss and cash flow analysis other than
the one already done using the CDOROM model. For a description
of the analysis, refer to the methodology and the CDOROM user guide
on Moody's website.
Moody's analysis of CSOs is subject to uncertainties, the primary
sources of which includes complexity, governance and leverage.
Although the CDOROM model captures many of the dynamics of the Corporate
CSO structure, it remains a simplification of the complex reality.
Of greatest concern are (a) variations over time in default rates for
instruments with a given rating, (b) variations in recovery rates
for instruments with particular seniority/security characteristics and
(c) uncertainty about the default and recovery correlations characteristics
of the reference pool. Similarly on the legal/structural side,
the legal analysis although typically based in part on opinions (and sometimes
interpretations) of legal experts at the time of issuance, is still
subject to potential changes in law, case law and the interpretations
of courts and (in some cases) regulatory authorities. The performance
of this CSO is also dependent on on-going decisions made by one
or several parties, including the Manager and the Trustee.
Although the impact of these decisions is mitigated by structural constraints,
anticipating the quality of these decisions necessarily introduces some
level of uncertainty in our assumptions. 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 base case scenario modeled fits into the central macroeconomic scenario
predicted by Moody's of a sluggish recovery scenario of the corporate
universe. Should macroeconomics conditions evolves towards a more
severe scenario such as a double dip recession, the CSO rating will
likely be downgraded to an extent depending on the expected severity of
the worsening conditions.
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.
Information sources used to prepare the credit rating are the following:
public information and confidential and proprietary Moody's Investors
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
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades its ratings of CDO Repackaging Trust Series 2004-(1 & 3), a CSO
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