Approximately US$62 million debt affected
New York, April 08, 2011 -- Moody's Investors Service announced today that it has downgraded one class
of notes issued by Regional Diversified Funding 2004-1 Ltd.:
U.S. $62,000,000 Class A-2 Floating
Rate Senior Notes Due 2034 Notes (Current balance $62 million),
Downgraded to Caa3 (sf); previously on January 7, 2010 Downgraded
to B1 (sf)
Regional Diversified Funding 2004-1 Ltd. issued on March
3, 2004, is a collateral debt obligation backed by a portfolio
of bank trust preferred securities (the 'TRUP CDO'). The last rating
action for this transaction was on January 7, 2010. At that
time, Moody's downgraded two classes of notes as a result of the
application of revised and updated key modeling assumptions, as
well as the deterioration in the credit quality of the transaction's underlying
Moody's indicated that the rating action on the notes is primarily the
result of an increase in the assumed defaulted amount of the pool and
continuation of an event of default. The defaults increased by
$49.5 mm since the last rating action on January 7,
2010. Moody's cumulative assumed default amount currently totals
$167.5 million (53% of the portfolio). All
of the assumed defaulted assets are carried at zero recovery in our analysis.
The remaining assets in the portfolio also experienced a slight deterioration
on the credit quality of the pool, as indicated by a WARF increase
to 2523, from 2347 as of the last rating action date. This
current WARF accounts for a credit estimate stress, described in
Moody's Rating Methodology "Updated Approach to the Usage of Credit Estimates
in rated Transactions", October 2009.
The par loss due to the increase in the assumed defaulted amount has resulted
in loss of overcollateralization for the tranche affected and an increase
of its expected loss since the last rating action. In addition,
the overcollateralization tests continue to breach their triggers,
resulting in a diversion of excess spreads to pay down Class A-1
notes. As of the latest trustee report dated January 31,
2011, the Senior Overcollateralization Test was reported at 103.10%
(limit of 125.0%), and the Senior Subordinate Overcollateralization
Test was reported at 61.94% (limit of 105.57%).
In our analysis, we assume that there are no prepayments and the
assets amortize at their final maturity. The weighted average life
of the portfolio is approximately 23 years.
The credit deterioration exhibited by the TRUP CDO portfolio is a reflection
of the continued pressure in the banking sector as the number of bank
failures and interest deferrals of bank trust preferred securities has
continued to increase. According to FDIC data, 26 banks failed
in 2011, 157 banks failed in 2010, 140 banks failed in 2009
and 25 banks failed in 2008.
This portfolio is composed of trust preferred securities issued by small
to medium sized U.S. community bank that are generally not
publicly rated by Moody's. To evaluate their credit quality,
Moody's uses RiskCalc model, an econometric model developed
by Moody's KMV, to derive credit scores for these non-publicly
rated trust preferred securities. Moody's evaluation of the credit
risk for a majority of obligors in the pool relies on FDIC financial data
received as of Q3-2010.
Moody's evaluates the sensitivity of the rated transactions to the volatility
of the credit estimates, as described in Moody's Rating Methodology
"Updated Approach to the Usage of Credit Estimates in Rated Transactions,"
October 2009. For each credit score or credit estimate where the
related exposure constitutes more than 3% of the collateral pool,
Moody's applied a 2-notch equivalent assumed downgrade (but 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. The
effect of stress testing of these credit scores varies between one and
three notches, depending on the total amount and relative size of
these securities in the collateral pool.
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
Moody's considers as well the structural protections in each transaction,
Event of Default (EoD) risk, 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
The principal methodologies used in rating this were "Moody's Approach
to Rating U.S. Bank Trust Preferred Security CDOs" published
in June 2010.
Due to the impact of revised and updated key assumptions referenced in
these rating methodologies, key model inputs used by Moody's in
its analysis, such as par, weighted average rating factor,
Moody's Asset Correlation, and weighted average recovery rate,
may be different from the trustee'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".
The transaction's portfolio was modeled, according to our rating
approach, using CDOROM v.2.8 to develop the loss distribution
from which the Moody's Asset Correlation parameter was obtained.
This parameter was then used as an input in a cash flow model using CDOEdge.
CDOROM v.2.8 is available on moodys.com under Products
and Solutions -- Analytical models, upon return of
a signed free license agreement.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Credit Policies & Methodologies
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.
Information sources used to prepare 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.
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.
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 ratings of TRUP CDO notes from Regional Diversified Funding 2004-1 Ltd.
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