Approximately $90.5 million securities affected
New York, April 13, 2011 -- Moody's has assigned definitive ratings to the Series 2011 Notes issued
by Double Diamond Funding III LLC. The transaction is a securitization
of resort lot loans sponsored by Double Diamond Delaware, Inc.
The depositors are Double Diamond Inc. and Eagle Rock Resort Co.
(wholly owned subsidiaries of the sponsor). The sponsor is a developer
of resort communities centered on recreational activities such as golf,
boating and skiing, in Texas and Pennsylvania. The complete
rating action is as follows:
Issuer: Double Diamond Funding III, LLC
Series 2011 Notes, Assigned A2 (sf)
RATINGS RATIONALE
The ratings are based primarily on an analysis of the credit quality of
the collateral, the collateral's historical performance, the
servicing ability of United Equitable Mortgage Corporation (an affiliate
of the sponsor), back-up servicer arrangement with First
Associates Loan Servicing, LLC (the primary back up servicer),
back-up servicer arrangement with Amresco Commercial Finance,
LLC (the secondary backup servicer), and the level of credit enhancement
available under the proposed capital structure. Collateral for
the transaction, originated by sponsor subsidiaries Double Diamond,
Inc. (DD) and Eagle Rock Resort Co. (ER), consists
of loans extended to consumer obligors and secured by mortgages on undeveloped
residential lots within resorts that are owned and developed by DD or
ER.
Moody's median cumulative gross loss expectation for the collateral pool
securitized in DDF III is 12.45%. The expected gross
default is based primarily on an analysis of the collateral's historical
performance -- including static pool performance for annual originations
and managed portfolio performance -- adjusted to reflect differences
between the economic conditions underlying the historical performance
and our expectation of future economic conditions. Moody's
A2 volatility proxy for the deal is 21.15% which reflects
a stressed gross default assumption plus a recovery rate of 15%.
Moody's V Score. The V Score for this transaction is Medium.
This is the first transaction backed by resort lot loans that Moody's
has rated. The V Score indicates " Medium" uncertainty about critical
assumptions. Moody's V Scores provide a relative assessment of
the quality of available credit information and the potential variability
around the various inputs to a rating determination. The V Score
ranks transactions by the potential for significant rating changes owing
to uncertainty around the assumptions that underlie the ratings within
the categories of data quality, historical performance and the level
of disclosure for each of the asset class sector and the issuer;
transaction complexity, analytical modeling and the market value
risk; transaction governance, backup servicing, alignment
of interests and legal, regulatory and other risks. V Scores
apply to the entire transaction (rather than individual tranches).
While the overall score is Medium, significant deviations from "Medium"
within the individual categories include the following: quality
of historical data for sector and sponsor, which are judged to be
medium-high because only limited resort properties in two states
are represented; alignment of interests risk which is medium-low,
due to the substantial amount of equity in the transaction which is held
by the sponsor; market value sensitivity, which is medium-high
due to the limited nature of the market for resort related residential
lots and the linkage of the property's value to the desirability
of the resorts and the sponsor's viability; and analytic complexity
which is medium-low due to the limited model complexity used to
evaluate the transaction.
Moody's Parameter Sensitivities: If the expected cumulative gross
losses used in determining the initial rating were changed to 13.90%,
16.70% or 19.60%, the initial model-indicated
rating for the Class A notes might change from A2 to A3, Baa2,
and Ba1 respectively. Parameter Sensitivities are not intended
to measure how the rating of the security might migrate over time,
rather they are designed to provide a quantitative calculation of how
the initial rating might change if key input parameters used in the initial
rating process differed. The analysis assumes that the deal has
not aged. Parameter Sensitivities only reflect the ratings impact
of each scenario from a quantitative/model-indicated standpoint.
Qualitative factors are also taken into consideration in the ratings process,
so the actual ratings that would be assigned in each case could vary from
the information presented in the Parameter Sensitivity analysis.
Additional research including a pre-sale report for this transaction
is available at www.moodys.com. The special reports,
"Updated Report on V Scores and Parameter Sensitivities for Structured
Finance Securities" and "V Scores and Parameter Sensitivities in the U.S.
Equipment Lease and Loan ABS Sector" are also available on moodys.com.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instrument
in this transaction.
PRINCIPAL METHODOLOGY
The credit analysis used for this pool is largely similar to that of other
amortizing assets, particularly Timeshare loans. Lot sale
prices reflect intangibles relating to the resort as a whole. While
the underlying loans in this securitization are secured by real property
in the form of residential lots, there is expected to be a significant
link between the recovery rate on the defaulted loans and the financial
well being of the sponsor. Similar to timeshares, recovery
is likely to rely on the remarketing efforts of the sponsor. Additionally,
the resale price on the lot is largely dependent upon the sponsors'
ability to maintain the resorts. However, unlike timeshare
loans, the collateral here is actual deeded land consisting of buildable
lots with access to water, sewer and electric. Furthermore,
the resorts are mostly complete and the maintenance cost of amenities
-- especially golf- are funded via lot owner association dues.
As such, we attributed less sponsor linkage to the collateral value,
and therefore, somewhat higher recoveries than would be the case
for a similarly sized timeshare sponsor.
Moody's considered the expected gross loss rate for this pool and
assumed a 15% recovery rate on defaulted loans in determining the
A2 volatility proxy. The expected loss and A2 volatility proxy
reflect our separated assessment of gross losses and recoveries.
Since this is a granular pool where no single underlying obligor would
likely affect the overall pool performance significantly, an actuarial
approach is used in determining expected gross losses. This credit
analysis uses historical summary statistical data regarding similar static
pools of receivables. The expected gross losses and the volatility
around those losses are analyzed in the context of the capital structure's
ability to insulate notes from defaulted contracts in determining Moody's
rating.
The gross loss analysis is based primarily on an analysis of the collateral's
historical performance -- including static pool performance
for annual originations and managed portfolio performance --
adjusted for seasoning and to reflect differences between the economic
conditions underlying the historical performance and our expectation of
future economic conditions. Managed portfolio performance data
tracks the delinquencies and gross losses that occur in each period as
a percentage of that period's loan balance of the sponsors'
overall portfolio of loans. Static pool data shows the ratio of
cumulative gross losses to original loan balance for a static pool of
assets that was originated in a given year. The mechanics of the
static pool analysis are essentially the same method applied to most other
major ABS asset classes. A detailed discussion of the analytical
technique can be found in "Moody's Approach to Rating Securities Backed
by Equipment Leases and Loans," April 2007, which can be found
at www.moodys.com in the Credit Policy & Methodologies
directory, in the Ratings Methodologies subdirectory.
Moody's considered a variety of factors in assessing variability
around the expected cumulative gross loss. These included:
historical performance data (including volatility of performance and performance
during distressed economic periods), pool characteristics,
and servicer capabilities and financial strength. Other similar
asset classes were compared to this pool in order to arrive at the total
required credit enhancement required for this transaction to be consistent
with the rating A2.
Credit enhancement in the structure includes overcollateralization,
excess spread, and a reserve account. The deal structure
also includes a delinquency trigger and a cap on annual payments to the
equity class. The level of credit enhancement was compared to the
expected gross defaults and expected recovery rate adjusted for loss volatility.
A variety of scenarios were considered adjusting loss timing, collateral
prepayment, and recovery rates. The magnitude and timing
of the losses under these various scenarios are compared to the credit
enhancement available to test breakeven loss levels.
Other methodologies and factors that may have been considered in the process
of rating this issue can be found at www.moodys.com in the
Ratings Methodologies subdirectory of the Credit Policy & Methodologies
directory.
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 assigning
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.
New York
Michael McDermitt
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Michael Labuskes
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
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's has assigned definitive ratings to resort-lot backed ABS notes sponsored by Double Diamond
