USD 2.3 million of debt securities affected
New York, September 02, 2010 -- Moody's Investors Service announced today that it has downgraded the rating
of one class of notes issued by Kent Funding II Ltd. The notes
affected by today's rating action are as follows:
Class X (current balance of $2,347,516), Downgraded
to Caa3 (sf); previously on April 22, 2009 Downgraded to B1(sf);
Kent Funding II Ltd. is a collateralized debt obligation issuance
backed primarily by a portfolio of residential mortgage-backed
securities (RMBS) originated in 2005 and 2006. RMBS comprise approximately
70% of the underlying portfolio.
According to Moody's, the rating downgrade actions today are the
result of deterioration in the credit quality of the underlying portfolio.
Such credit deterioration is observed through numerous factors,
including a decline in the average credit rating of the portfolio (as
measured by an increase in the weighted average rating factor),
an increase in the dollar amount of defaulted securities, and failure
of the coverage tests. The dollar amount of defaulted securities,
as reported by the trustee in August 2010, is 453,575,459,
which comprises about 50% of the portfolio . The Class A/B
Overcollateralization ratio decreased from 53.54% in April
2009 to 34.53% in August 2010 and all the other OC and IC
tests have been failing and continuously deteriorating. The WARF
increased from 1709 to 2243. The Class X, which receives
its payment from interest proceeds, did not receive any payment
on the last payment date in August. Moody's noted that the transaction
is negatively impacted by a large pay-fixed, receive-floating
interest rate swap where payments to the hedge counterparty absorb a large
portion of the interest proceeds in the deal.
Moody's notes that an Event of Default under Section 5.1(a)(viii)
of the Indenture was declared by the Trustee on June 11, 2008 due
to the calculation of Net Outstanding Portfolio Collateral Balance divided
by the Net Outstanding Portfolio Collateral Balance falling below 100%.
Acceleration was declared on July 10, 2008. As provided in
Article V of the Indenture during the occurrence and continuance of an
Event of Default, certain parties to the transaction may be entitled
to direct the Trustee to take particular actions with respect to the Collateral
and the Notes, including the sale and liquidation of the assets.
The severity of losses of certain tranches may be different depending
on the timing and outcome of a liquidation.
Moody's also explained that in arriving at the rating action described
above it performed a number of sensitivity analyses whereby one or more
key variables were changed. For example, if defaulted assets
in the pool continue to increase causing a sustained shortfall in interest
payments, then the current rating could deteriorate by 1 notch.
Moody's notes that in arriving at its ratings of ABS CDOs, there
exist a number of sources of uncertainty, operating both on a macro
level and on a transaction-specific level. Among the general
macro uncertainties are those surrounding future housing prices,
pace of residential mortgage foreclosures, loan modification and
refinancing, unemployment rate and interest rates.
Moody's explained that in arriving at the rating action noted above,
the ratings of subprime, Alt-A and Option-ARM RMBS
which are currently on review for possible downgrade were stressed.
For purposes of monitoring its ratings of SF CDOs with exposure to such
2005-2007 vintage RMBS, Moody's used certain projections
of the lifetime average cumulative losses as set forth in Moody's press
releases dated January 13th for subprime, January 14th for Alt-A,
and January 27th for Option-ARM. Based on the anticipated
ratings impact of the updated cumulative loss numbers, the stress
varied based on vintage, current rating, and RMBS asset type.
For 2005 Alt-A and Option-ARM securities, securities
that are currently rated Aaa (sf) or Aa (sf) were stressed by eleven notches,
and securities currently rated A (sf) or Baa (sf) were stressed by eight
notches. Those securities currently rated in the Ba (sf) or B (sf)
range were stressed to Caa3 (sf), while current Caa (sf) securities
were treated as Ca (sf). For 2006 and 2007 Alt-A and Option-ARM
securities, currently Aaa (sf) or Aa (sf) rated securities were
stressed by eight notches, and securities currently rated A (sf)
, Baa (sf) or Ba (sf) were stressed by five notches. Those
securities currently rated in the B range were stressed to Caa3 (sf),
while current Caa (sf) securities were treated as Ca (sf).
For 2005 subprime RMBS, those currently rated Aa (sf), A (sf)
or Baa (sf) were stressed by five notches, Ba (sf) rated securities
were stressed to Caa3 (sf), and B (sf) or Caa (sf) securities were
treated as Ca (sf). For subprime RMBS originated in the first half
of 2006, those currently rated Aaa (sf) were stressed by four notches,
while Aa (sf), A (sf) and Baa (sf) rated securities were stressed
by eight notches. Those securities currently rated in the Ba (sf)
range were stressed to Caa3 (sf), while current B (sf) and Caa (sf)
securities were treated as Ca (sf). For subprime RMBS originated
in the second half of 2006, those currently rated Aa (sf),
A (sf) , Baa (sf) or Ba (sf) were stressed by four notches,
currently B (sf) rated securities were treated as Caa3 (sf), and
currently Caa (sf) rated securities were treated as Ca (sf). For
2007 subprime RMBS, currently Ba (sf) rated securities were stressed
by four notches, currently B (sf) rated securities were treated
as Caa3 (sf), and currently Caa (sf) rated securities were treated
as Ca (sf).
Moody's noted that the stresses applicable to categories of 2005-2007
subprime RMBS that are not listed above will be two notches if the RMBS
ratings are on review for possible downgrade.
For purposes of monitoring its ratings of SF CDOs with exposure to pre-2005
vintage RMBS, Moody's considered the various factors indicating
continued negative performance that were described in Moody's press releases
dated April 8th for subprime, April 12th for Option-ARM and
April 13th for Alt-A. Such seasoned deals will have varying
stress based on RMBS asset type.
For pre-2005 Alt-A, Aaa (sf) rated securities were
stressed by four notches, Aa (sf) rated securities by six notches,
and A (sf ) or Baa (sf) rated securities by nine notches. Pre-2005
Option-ARM securities currently rated Aaa (sf) were stressed by
two notches, Aa (sf) and A (sf) by six notches, and Baa (sf)
by nine notches.
For pre-2005 subprime, Aaa (sf) and Aa (sf) rated securities
were stressed by two notches, A (sf) rated securities were stressed
by six notches, and Baa (sf) rated securities were stressed by nine
All subprime, Alt-A and Option-ARM RMBS securities
which originated prior to 2005, are currently rated Ba (sf) or below,
and are also currently on review for possible downgrade have been stressed
to Ca (sf).
Moody's further explained that these stresses are based on a preliminary
sample analysis of deals from a given vintage and asset type, and
that they will be utilized in its SF CDO rating analysis while subprime,
Alt-A and Option-ARM securities remain on review for downgrade.
Current public ratings will be used for securities that have undergone
an in depth review by our RMBS team, and that are no longer on review
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 environment, the
legal environment, specific documentation features, the collateral
manager's track record, and the potential for selection bias in
the portfolio. 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.
In deriving its ratings, Moody's uses the collateral instrument's
current rating-based expected loss, Moody's recovery rate
table, and the original rating of the instrument along with its
average life to infer an unadjusted default probability.
The approach Moody's takes to defining the default distribution for the
SF CDO collateral depends on the structure of the CDO itself.
Moody's applied the Monte Carlo simulation framework within CDOROMv2.6
to model the loss distribution for SF CDOs. Within this framework,
defaults are generated so that they occur with the frequency indicated
by the adjusted default probability pool (the default probability associated
with the current rating multiplied by the Resecuritization Stress) for
each credit in the reference. Specifically, correlated defaults
are simulated using a normal (or "Gaussian") copula model that applies
the asset correlation framework. Recovery rates for defaulted credits
are generated by applying within the simulation the distributional assumptions,
including the correlation between recovery values. Together,
the simulated defaults and recoveries across each of the Monte Carlo scenarios
define the loss distribution for the reference pool.
The capital structure is incorporated into CDOROM by specifying the attachment
point and the thickness of the tranche. The Expected Loss (EL)
for each tranche is the weighted average of losses to each tranche across
all the scenarios, where the weight is the likelihood of the scenario
occurring. Moody's defines the loss as the shortfall in the present
value of cash flows to the tranche relative to the present value of the
promised cash flows. The discount rate used to present value is
the current swap rate plus the promised spread on the tranche based on
its remaining maturity. Solely for the purpose of discounting losses,
Moody's assumes that losses on the tranche occur 60% of the way
through the maturity of the tranche. The final EL of the synthetic
SF CDO tranche is the discounted average of the tranche loss across all
the scenarios simulated in CDOROM. Since the EL is based on a simulation
process, the convergence of the simulation will depend, in
part, on the number of iterations chosen for the simulation.
Moody's applies a 99% confidence interval to the EL result using
a Standard Error equal to the square root of the EL Variance divided by
the number of Monte Carlo simulations. If this confidence interval
adjustment is significant, a larger number of iterations may be
used to reduce the standard error.
The principal methodology used in rating Kent Funding II, Limited
was "Moody's Approach to Rating SF CDOs" rating methodology published
in August 2009. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found on Moody's
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 6 months.
Information sources used to determine the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and
confidential and proprietary Moody's Analytics' 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.
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.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit 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.
Senior Vice President
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades the rating of Notes issued by Kent Funding II, Limited, an ABS CDO
250 Greenwich Street
New York, NY 10007