New York, July 30, 2009 -- Moody's Investors Service announced today that it has downgraded the ratings
of the following notes issued by Race Point III CLO:
U.S. $451,200,000 Class A Senior Secured
Floating Rate Notes Due 2020, Downgraded to A3; previously
on April 27, 2006 assigned Aaa;
U.S. $25,200,000 Class B Senior Secured
Floating Rate Notes Due 2020, Downgraded to Baa3; previously
on March 4, 2009 Aa2 Placed Under Review for Possible Downgrade;
U.S. $42,000,000 Class C Secured Deferrable
Floating Rate Notes Due 2020, Downgraded to B2; previously
on March 4, 2009 A2 Placed Under Review for Possible Downgrade;
U.S. $31,200,000 Class D Secured Floating
Rate Notes Due 2020, Downgraded to Caa3; previously on March
4, 2009 Baa2 Placed Under Review for Possible Downgrade;
U.S. $10,800,000 Class E Secured Floating
Rate Notes Due 2020, Downgraded to Ca; previously on March
4, 2009 Ba2 Placed Under Review for Possible Downgrade.
According to Moody's, the rating actions taken on the notes are
a result of credit deterioration of the underlying portfolio. The
actions also reflect Moody's revised assumptions with respect to default
probability, the treatment of ratings on "Review for Possible Downgrade"
or with a "Negative Outlook," the application of certain stresses
with respect to the default probabilities associated with certain Moody's
credit estimates, and the calculation of the Diversity Score.
The revised assumptions that have been applied to all corporate credits
in the underlying portfolio are described in the press release dated February
4, 2009, titled "Moody's updates key assumptions for rating
CLOs." Moody's analysis also reflects the expectation that recoveries
for high-yield corporate bonds and second lien loans will be below
their historical averages, consistent with Moody's research (see
Moody's Special Comment titled "Strong Loan Issuance in Recent Years Signals
Low Recovery Prospects for Loans and Bonds of Defaulted U.S.
Corporate Issuers," dated June 2008).
Credit deterioration of the collateral pool is observed through a decline
in the average credit rating (as measured by the weighted average rating
factor), an increase in the amount of defaulted securities,
and an increase in the proportion of securities from issuers rated Caa1
and below. The weighted average rating factor has steadily increased
over the last year and is currently 3172 versus a test level of 2945 as
of the last trustee report, dated June 16, 2009. Based
on the same report, defaulted securities total about $54.89
million, accounting for roughly 9.0% of the collateral
balance, and securities rated Caa1 or lower make up approximately
19.69% of the underlying portfolio.
Moody's notes that a significant proportion of the collateral pool
is concentrated in non-U.S. dollar denominated obligations
from issuers in a relatively limited number of industries.
Moody's also notes that a material proportion of the collateral pool includes
debt obligations whose credit quality has been assessed through Moody's
Credit Estimates ("CEs"). Moody's analysis reflects the application
of certain stresses with respect to the default probabilities associated
with CEs. These additional stresses reflect the rapid pace of recent
changes in credit market conditions and the default rate expectations
in the current economic cycle that are higher than the historical averages.
Specifically, the default probability stresses include (1) a 1.5
notch-equivalent assumed downgrade for certain CEs updated between
12-15 months ago; and (2) assuming an equivalent of Caa3 for
certain CEs that were not updated within the last 15 months. Additionally,
as CEs do not carry credit indicators such as ratings reviews and outlooks,
a stress of a 0.25-0.5 notch-equivalent assumed
downgrade was applied to certain estimates.
Due to the impact of all aforementioned stresses, key model inputs
used by Moody's in its analysis, such as par, weighted average
rating factor, and weighted average recovery rate, may be
different from the trustee's reported numbers.
Race Point III CLO, issued on April 13, 2006, is a multi-currency
collateralized loan obligation backed primarily by a portfolio of senior
secured loans denominated in U.S. dollars, euros,
and pounds sterling.
The principal methodologies used in rating and monitoring the transaction
are described in the following publications, which can be found
at www.moodys.com in the Credit Policy & Methodologies
directory, in the Rating Methodologies subdirectory:
Moody's Approach to Rating Collateralized Loan Obligations (December 31,
Moody's Approach to Rating Multi-Currency CDOs (September
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found in the Credit Policy & Methodologies
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.
Ramon O. Torres
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's downgrades the ratings of five notes issued by Race Point III CLO
Structured Finance Group
Moody's Investors Service