USD $106 million of debt securities affected
New York, March 22, 2011 -- Moody's Investors Service announced today that it has downgraded the ratings
of the following notes issued by Highland Loan Funding V Ltd.:
U.S.$33,000,000 Class A-II-A
Floating Rate Senior Notes due 2014, Downgraded to B1 (sf);
previously on September 14, 2009 Downgraded to Baa3 (sf);
U.S.$10,000,000 Class A-II-B
Fixed Rate Senior Notes due 2014, Downgraded to B1 (sf); previously
on September 14, 2009 Downgraded to Baa3 (sf);
U.S.$24,500,000 Class B Floating Rate
Senior Subordinate Notes due 2014 (current balance of $24,822,304),
Downgraded to Ca (sf); previously on September 14, 2009 Downgraded
to Caa1 (sf);
U.S.$25,000,000 Class C-1 Floating
Rate Senior Subordinate Notes due 2014 (current balance of $24,033,395),
Downgraded to C (sf); previously on September 14, 2009 Downgraded
to Ca (sf);
U.S.$5,000,000 Class C-2 Fixed
Rate Senior Subordinate Notes due 2014 (current balance of $5,226,972),
Downgraded to C (sf); previously on September 14, 2009 Downgraded
to Ca (sf);
U.S.$8,000,000 Class D Floating Rate
Subordinate Notes due 2014 (current balance of $9,043,903),
Downgraded to C (sf); previously on September 14, 2009 Downgraded
to Ca (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes are
a result of credit deterioration on the underlying portfolio since the
last rating action in September 2009. Such credit deterioration
is observed through an increase in the dollar amount of defaulted securities,
an increase in the proportion of securities from issuers rated Caa1 and
below, and failure of the Principal Coverage Tests. Based
on the January 2011 trustee report, securities rated Caa1 and below
make up approximately 7.1% of the underlying portfolio versus
4.1% in July 2009. The deal also experienced an increase
in defaults. The dollar amount of defaulted securities has increased
to $70.5 million, accounting for approximately 23.0%
of the underlying portfolio, from approximately $64 million
in July 2009, accounting for approximately 13.6% of
the underlying portfolio in July 2009. Moody's also notes that
the overcollateralization ratios of the rated notes have deteriorated.
As of the January 2011 trustee report, the Class A, Class
B, Class C, and Class D overcollateralization ratios are reported
at 112.27%, 102.21%, 92.50%,
and 89.80%, respectively, versus July 2009 levels
of 117.13%, 109.96%, 102.87%,
and 100.98%, respectively. Interest payments
on the Class B, Class C, and Class D Notes are presently being
deferred as a result of the failure of the Class A Principal Coverage
Test.
Additionally, Moody's noted that the portfolio includes a number
of investments in securities that mature after the maturity date of the
notes. As of the January 2011 trustee report, securities
that mature after the maturity date of the notes make up approximately
28% of the underlying portfolio versus 4.5% in July
2009. These investments potentially expose the notes to market
risk in the event of liquidation at the time of the notes' maturity.
Moody's also assessed the collateral pool's elevated concentration risk
in debt obligations of companies in the banking, finance,
real estate, and insurance industries, which Moody's views
to be more strongly correlated in the current market environment.
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Collateralized Loan Obligations" and "Annual
Sector Review (2009): Global CLOs," key model inputs used
by Moody's in its analysis, such as par, weighted average
rating factor, diversity score, and weighted average recovery
rate, may be different from the trustee's reported numbers.
In its base case, Moody's analyzed the underlying collateral pool
to have a performing par and principal proceeds balance of $231.6
million, defaulted par of $70.5 million, a weighted
average default probability of 29.3% (implying a WARF of
5010), a weighted average recovery rate upon default of 39.7%,
and a diversity score of 29. These default and recovery properties
of the collateral pool are incorporated in Moody's cash flow model analysis
where they are subject to stresses as a function of the target rating
of each CLO liability being reviewed. The default probability is
derived from the credit quality of the collateral pool and Moody's expectation
of the remaining life of the collateral pool. The average recovery
rate to be realized on future defaults is based primarily on the seniority
of the assets in the collateral pool. In each case, historical
and market performance trends and collateral manager latitude for trading
the collateral are also factors.
Highland Loan Funding V Ltd., issued in August of 2001,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in this ratings was "Moody's Approach to
Rating Collateralized Loan Obligations" published in August 2009.
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.
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 2.3.2.1 of the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009.
In addition to the base case analysis described above, Moody's also
performed sensitivity analyses to test the impact on all rated notes of
various default probabilities. Below is a summary of the impact
of different default probabilities (expressed in terms of WARF levels)
on all rated notes (shown in terms of the number of notches' difference
versus the current model output, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF - 20% (4008)
Class A-I: +1
Class A-II-A: +2
Class A-II-B: +2
Class B: 0
Class C-1: 0
Class C-1: 0
Class D: 0
Moody's Adjusted WARF + 20% (6012 )
Class A-I: -2
Class A-II-A:-1
Class A-II-B: -1
Class B: 0
Class C-1: 0
Class C-1: 0
Class D: 0
Moody's notes that this transaction is subject to a high level of macroeconomic
uncertainty, as evidenced by 1) uncertainties of credit conditions
in the general economy and 2) the large concentration of speculative-grade
debt maturing between 2012 and 2014 which may create challenges for issuers
to refinance. CDO notes' performance may also be impacted by 1)
the manager's investment strategy and behavior and 2) divergence in legal
interpretation of CDO documentation by different transactional parties
due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Recovery of defaulted assets: Market value fluctuations in defaulted
assets reported by the trustee and those assumed to be defaulted by Moody's
may create volatility in the deal's overcollateralization levels.
Further, the timing of recoveries and the manager's decision to
work out versus sell defaulted assets create additional uncertainties.
Moody's analyzed defaulted recoveries assuming the lower of the market
price and the recovery rate in order to account for potential volatility
in market prices.
2) Exposure to credit estimates: The deal is exposed to a large
number of securities whose default probabilities are assessed through
credit estimates. In the event that Moody's is not provided the
necessary information to update the credit estimates in a timely fashion,
the transaction may be impacted by any default probability stresses Moody's
may assume in lieu of updated credit estimates.
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.
REGULATORY DISCLOSURES
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.
New York
Shan Lai
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Ramon O. Torres
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades the ratings of CLO notes issued by Highland Loan Funding V Ltd.
