New York, August 05, 2010 -- Moody's Investors Service announced today that it has downgraded the rating
of two classes of notes issued by Reservoir Funding Limited. The
notes affected by today's rating action are as follows:
U.S. $374,900,000 Class A-1-NV
First Priority Senior Non-Voting Floating Rate Notes Due 2040 (current
balance of $261,177,865), Downgraded to Caa3
(sf); previously on March 26, 2009 Downgraded to Caa1 (sf);
U.S.$100,000 Class A-1-V First
Priority Senior Floating Rate Notes Due 2040 (current balance of $69,666),
Downgraded to Caa3 (sf); previously on March 26, 2009 Downgraded
to Caa1 (sf).
Reservoir Funding Limited is a collateralized debt obligation issuance
backed by a portfolio of primarily Residential Mortgage-Backed
Securities (RMBS) originated between 2003 and 2004.
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. Defaulted securities, as reported
by the trustee, have increased from $101 million in March
2009 to $159 million in June 2010. 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 excess spread in the deal.
Additionally, approximately $89 million of RMBS within the
underlying portfolio are currently on review for possible downgrade as
a result of Moody's updated loss projections.
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 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 rated securities were stressed
by four notches, Aa rated securities by six notches, and A
or Baa rated securities by nine notches. Pre-2005 Option-ARM
securities currently rated Aaa were stressed by two notches, Aa
and A by six notches, and Baa by nine notches.
For pre-2005 subprime, Aaa and Aa rated securities were stressed
by two notches, A rated securities were stressed by six notches,
and Baa rated securities were stressed by nine notches.
All subprime, Alt-A and Option-ARM RMBS securities
which originated prior to 2005, are currently rated Ba or below,
and are also currently on review for possible downgrade have been stressed
to Ca.
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
for downgrade.
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.
Moody's continues to monitor this transaction using primarily the methodology
and its supplements for ABS CDOs as described in Moody's Special Report
below:
- Moody's Approach to Rating SF CDOs (August 2009)
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. 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, 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.
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
Rodrigo Araya
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Alena Chen
Associate Analyst
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
USA
Moody's downgrades the ratings of Notes issued by Reservoir Funding Limited, an ABS CDO