USD $334 million of debt securities affected
New York, November 23, 2010 -- Moody's Investors Service announced today that it has downgraded the ratings
of the following notes issued by Non-Profit Preferred Funding Trust
I Structured Tax-Exempt Pass-Through (STEP) Certificates:
U.S.$90,000,000 Class A-1 Senior
Certificates Notes due 2037 (current outstanding balance of $79,387,365),
Downgraded to Aa3 (sf); previously on March 26, 2010 Aaa (sf)
Placed Under Review for Possible Downgrade;
U.S. $230,000,000 Class A-2 Delayed
Issuance Senior Certificates due 2037 (current outstanding balance of
$202,280,770), Downgraded to Aa3 (sf); previously
on March 26, 2010 Aaa (sf) Placed Under Review for Possible Downgrade;
U.S. $16,500,000 Class B Senior Certificates
due 2037, Downgraded to Baa3 (sf); previously on March 26,
2010 Aa2 (sf) Placed Under Review for Possible Downgrade;
U.S. $22,000,000 Class C Mezzanine Certificates
due 2037, Downgraded to B2 (sf); previously on March 26,
2010 A2 (sf) Placed Under Review for Possible Downgrade;
U.S. $14,000,000 Class D Subordinate
Certificates due 2037, Downgraded to Caa2 (sf); previously
on March 26, 2010 Baa2 (sf) Placed Under Review for Possible Downgrade.
According to Moody's, the rating actions taken on the notes result
primarily from the increased default probability assumptions on the underlying
municipal credits as well as the actual credit deterioration of the underlying
portfolio since the last rating action in March 2010.
To assign default probabilities to each obligation, Moody's took
into account the idealized corporate default probabilities, in connection
with the recalibration of US municipal ratings to a global scale,
and described in "Recalibration of Moody's U.S. Municipal
Ratings to its Global Rating Scale," published on March 16,
2010. Moody's used a default distribution generated by CDOROM in
conjunction with the cashflow model (CDOEdge) to evaluate the expected
losses for the tranches. CDOROM is based on a Monte Carlo simulation
framework, within which, defaults are generated so that they
occur with the frequency indicated by the default probability for each
credit in the pool. Correlated defaults are simulated using a normal
(or "Gaussian") copula model that applies the asset correlation framework
as described in more detail in CDOROM v2.6 User Guide. Recovery
rate assumptions for the cash flow analysis were applied pursuant to the
approach outlined in "The U.S. Municipal Bond Rating Scale:
Mapping to the Global Rating Scale And Assigning Global Scale Ratings
to Municipal Obligations," published in March 2007.
Deterioration in the credit quality of the underlying portfolio since
the last rating action is evidenced by an increase in WARF and increase
in dollar amount of defaulted securities. Based on the September
2010 trustee report, the weighted average rating factor is 2527
compared to 2153 in March 2010. The dollar amount of defaulted
securities increased to about $38 million from approximately $26
million in March 2010. The deterioration in WARF is partially the
result of asset sales since the last rating action in March 2010.
Meanwhile, because the proceeds from sales were used to delever
the senior notes, it also has a positive impact on the notes.
Moody's also notes that the overcollateralization ratios have deteriorated
since the last rating action. As of the latest trustee report dated
September 8, 2010, the Class A/B, C, and D overcollateralization
ratios are reported at 114.20%, 106.86%,
and 102.66%, respectively, versus March 2010
levels 115.85%, 108.47%, and 104.24%,
respectively. The September 2010 overcollateralization levels do
not reflect the principal payment of $22 million to the Class A
noteholders on the September 15, 2010 payment date.
Due to the impact of revised and updated key assumptions and key model
inputs used by Moody's in its analysis, such as par, weighted
average rating factor, weighted average recovery rate, and
a weighted average life, 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 of $327
million, defaulted par of $38 million, a WARF of 3332,
a weighted average recovery rate upon default of 53.45%,
and a weighted average life remaining on the pool of 15.7 years.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default
probability stresses. 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). Notwithstanding
the foregoing, in all cases the lowest assumed rating equivalent
These default and recovery properties of the collateral pool are incorporated
in cash flow model analysis. 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.
Other methodologies and factors that may have been considered in the process
of rating this issuer include "Moody's Approach to Rating Collateralized
Loan Obligations" rating methodology published in August 2009 and
"Updated Approach to the Usage of Credit Estimates in Rated Transactions"
published in October 2009. These additional methodologies can be
found on Moody's website.
Non-Profit Preferred Funding Trust I Structured Tax-Exempt
Pass-Through (STEP) Certificates, issued in 2006, is
a static deal backed primarily by a portfolio consisting of municipal
tax-exempt issuance in the healthcare, utilities, and
In addition to the base case analysis described above, Moody's also
performed a number of sensitivity analyses to test the impact on all rated
notes, including the following:
1. Various default probabilities to capture potential defaults
in the underlying portfolio.
2. A range of recovery rate assumptions for all assets to capture
variability in recovery rates.
For the various default probability analyses, the impact on the
ratings reflecting a slightly higher WARF was approximately one to two
notches for all notes. The impact on the ratings reflecting a slightly
lower WARF was approximately one to four notches for all notes.
For the recovery rate analyses, the impact on the ratings was approximately
zero to one notch for all notes.
Moody's notes that this transaction is subject to a high level of
macroeconomic uncertainty, as evidenced by uncertainties of credit
conditions in the general economy.
Sources of additional performance uncertainties are described below:
1) Delevering: The main source of uncertainty in this transaction
is whether delevering from unscheduled principal proceeds will continue
and at what pace. Delevering may accelerate due to collateral sales
by the manager, which may have significant impact on the notes'
ratings. The sale of collateral will result in additional delevering
that will increase the overcollateralization ratios. However,
if the collateral sales consist of higher-rated assets, the
WARF could further deteriorate.
2) 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 selling defaulted assets create additional uncertainties.
3) Weighted average life: The notes' ratings are sensitive
to the weighted average life assumption of the portfolio, due to
the longer tenor attributed to municipal borrowers.
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.
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 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
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.
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.
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.
Structured Finance Group
Moody's Investors Service
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades the ratings of notes issued by Non-Profit Preferred Funding Trust I
250 Greenwich Street
New York, NY 10007