USD $1 billion of debt securities affected
New York, February 11, 2011 -- Moody's Investors Service announced today that it has downgraded the ratings
of the following notes issued by Zohar III, Limited:
U.S. $200,000,000 Class A-1R Floating
Rate Senior Secured Revolving Notes Due 2019, Downgraded to A3 (sf);
previously on June 12, 2009 Downgraded to A1 (sf);
U.S. $150,000,000 Class A-1T Floating
Rate Senior Secured Term Notes Due 2019, Downgraded to A3 (sf);
previously on June 12, 2009 Downgraded to A1 (sf);
U.S. $350,000,000 Class A-1D Floating
Rate Senior Secured Delayed Drawdown Notes Due 2019, Downgraded
to A3 (sf); previously on June 12, 2009 Downgraded to A1 (sf);
U.S. $200,000,000 Class A-2 Floating
Rate Second Priority Senior Secured Term Notes Due 2019, Downgraded
to Ba2 (sf); previously on June 12, 2009 Downgraded to Baa2
(sf);
U.S. $116,000,000 Class A-3 Floating
Rate Third Priority Senior Secured Term Notes Due 2019, Downgraded
to B3 (sf); previously on June 12, 2009 Downgraded to Ba3 (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes are
a result of further credit deterioration of the underlying portfolio since
the rating action in June 2009.
Credit deterioration of the collateral pool is observed through a decline
in the average credit rating (as measured through the weighted average
rating factor and calculated by Moody's), and an increase in the
proportion of securities from issuers with a Credit Estimate of Caa1 and
below. Based on the December 2010 trustee report, the dollar
amount of defaulted securities has increased to about $64 million
from approximately $61 million in March 2009. The Class
A overcollateralization ratio has decreased and is reported at 125.3%,
versus March 2009 level of 127.0%.
Moody's assessed the collateral pool's elevated concentration
risk of obligors in excess of 3% with stale credit estimates and
the credit deterioration in the underlying pool as a result of an increase
in the rating factors and decline in recovery rates of updated credit
estimates. Moody's also notes that approximately 39%
of the assets in the collateral pool are either unrated, have no
Credit Estimate or have a Credit Estimate that has not been updated for
more than 15 months.
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 $1,245 million, defaulted par of $64 million,
weighted average default probability of 51.11% (implying
a WARF of 7318), a weighted average recovery rate upon default of
38.36%, and a diversity score of 27. Moody's
adjusted WARF has increased since the last rating action due to the percentage
of securities in the underlying portfolio that are unrated, have
no Credit Estimate or have a Credit Estimate that has not been updated
for more than 15 months. These default and recovery properties
of the collateral pool are incorporated in 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.
Zohar III, Limited, issued in April 6, 2007, is
a collateralized loan obligation backed primarily by a portfolio of senior
secured loans, most of which rely on credit estimates.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009,
and "Updated Approach to the Usage of Credit Estimates in Rated Transactions"
published in October 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, due to the low diversity of
the collateral pool, CDOROM 2.6 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default
probability stresses by assuming an equivalent of Caa3 for CEs that were
not updated within the last 15 months, which currently account for
approximately 7% of the collateral balance. In addition,
Moody's applied a 0.5 notch-equivalent assumed downgrade
for CEs last updated between 6-12 months ago. For each CE
where the related exposure constitutes more than 3% of the collateral
pool, Moody's applied a 2-notch equivalent assumed
downgrade (but only on the CEs representing in aggregate the largest 30%
of the pool) in lieu of the aforementioned stresses. Notwithstanding
the foregoing, in all cases the lowest assumed rating equivalent
is Caa3.
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, where
a positive difference corresponds to lower expected loss), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (5854)
Class A1R: +4
Class A1T: +4
Class A1D: +4
Class A2: +3
Class A3: +4
Moody's Adjusted WARF + 20% (8781)
Class A1R: -4
Class A1T: -4
Class A1D: -4
Class A2: -6
Class A3: -6
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 managers' 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.
2) Weighted average life: The notes' ratings are sensitive
to the weighted average life assumption of the portfolio, which
may be extended due to the manager's decision to reinvest into new
issue loans or other loans with longer maturities and/or participate in
amend-to-extend offerings.
3) Other collateral quality metrics: The deal is allowed to reinvest
and the manager has the ability to deteriorate the collateral quality
metrics' existing cushions against the covenant levels.
4) 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. Moody's also conducted
stress tests to assess the collateral pool's concentration risk in obligors
bearing a credit estimate that constitute more than 3% of the collateral
pool.
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.
However, Moody's notes that the transaction has significant
exposure to unrated securities and securities whose default probabilities
were assessed through Moody's credit estimates issued more than
fifteen months ago.
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
Raina Patel
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Jian Hu
MD - Structured Finance
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 Zohar III, Limited
