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22 Jun 2011
New York, June 22, 2011 -- Moody's has placed two lottery receivables asset backed notes separately
issued by the Tekoa Lottery Trust and the Fernwood Lottery Trust and sponsored
and serviced by Western United Life Assurance Company (WULA, unrated)
on review for possible downgrade. WULA is a life insurance company
formed under the laws of the State of Washington. The notes are
each backed by cash flows from distinct pools of specified lottery winnings
from various state lotteries (lottery receivables). The complete
rating actions are as follows:
Issuer: Tekoa Lottery Trust
Tekoa Certificate, on review for possible downgrade; previously
on December 17, 2010 Downgraded to Baa1 (sf);
Issuer: Fernwood Lottery Trust
Fernwood Certificate, on review for possible downgrade; previously
on December 17, 2010 Downgraded to Baa1 (sf)
Today's actions are motivated by Moody's determination that the
rated certificates are exposed to losses when underlying loans prepay
at a discount. In April 2011, two loans in the Tekoa Trust
and one loan in the Fernwood Trust prepaid. According to the Loan
Agreements relating to all of the loans backing the certificates,
loans may be prepaid on any payment date at a specified discount rate.
The discount rate varies slightly among different Loan Agreements.
The three loans that prepaid in April were discounted at the five year
treasury rate plus 25 basis points.
Since the outstanding Certificate balances in these deals equate to the
undiscounted balances of all future lottery receivables under each deal
minus the future servicing and trustee fees, the outstanding principal
balances of the Certificates will sustain a loss for any discounted prepayments.
The discounted principal amounts associated with the April loan prepayments
account for 26 basis points for the Tekoa Certificate and 2 basis points
for the Fernwood Certificate. In addition, each of the Tekoa
and Fernwood Trusts have other loans that could prepay, which may
result in additional losses to the Trusts. Currently, 3%
and 6% of Fernwood Trust's and Tekoa Trust's assets,
respectively, are loans.
The principal methodology used in these rating actions is described below.
Other methodologies and factors that may have been considered in the process
of rating this issue can also be found at www.moodys.com
in the Rating Methodologies sub-directory.
PRINCIPAL METHODOLOGY
The notes issued by the trusts pay no interest and principal is due at
their legal final maturity date. The transactions lack both an
overcollateralization and liquidity component. WULA acts as servicer
for the transactions.
The collateral backing the notes consist of entitlements to lottery winnings
indirectly owned by the issuers. The issuers are Delaware business
trusts that hold 100% of the beneficial interest in certain other
grantor trusts that directly own lottery winnings entitlements that are
obligations of several state lottery commissions. Each receivable,
as required by the law of the relevant state, is transferred to
a grantor trust pursuant to a court order which details the payments assigned
and concludes that the transfer is in accordance with the relevant state
statute. A relatively small percentage of the receivables in these
pools consist of lottery loans (loans made to lottery winners secured
by the lottery payments rather than sales of the lottery winnings).
The lottery commissions' payment obligations on the lottery receivables
are backed by monies that are set aside and invested by the commissions
pursuant to their investment guidelines as in effect from time to time.
However these monies does not secure the lottery receivables or the ABS
notes, they merely help assure the ability of the respective commissions
to honor their obligations. Further, such investment guidelines
may change through the ABS transaction's life.
To evaluate lottery receivables backed ABS, we use a weighted average
probability of default approach to determine the likelihood that the lottery
receivables will be paid by the state lottery commissions, The probability
of default of the state lottery commission's payment obligations in all
cases except Pennsylvania, is estimated based on its state's current
rating, reduced by three notches to account for (1) reductions in
the financial strength of the states during recessions during the transaction's
life and (2) the fact that some of the lottery commissions are not able
to access general revenue of the state but instead can only rely on the
value of their state-granted monopoly franchise to conduct the
lottery.
In the case of Pennsylvania, unless the account is expressly backed
by treasury strips, the account is treated differently since Pennsylvania
disallows any recourse to it by its lottery commission. After 1986
the Pennsylvania lottery commission changed the method of funding lotteries
to purchasing annuity contracts. Since Pennsylvania expressly disallows
any recourse to it by its lottery commission, in cases where the
Pennsylvania accounts are earmarked as obligations of specific annuity
providers, we simulate the probability of default of the annuity
provider based on its insurance financial strength rating and Moody's
idealized default rates. We stress the rating of the financial
strength rating of the annuity provider by one notch to provide a limited
degree of de-linkage of the rated ABS.
After the weighted probability of default for the securitized lottery
receivables in the pool is determined, we reduce the rating output
by two notches to account for operational risk associated with the servicer's
obligations to monitor the lottery receivables payments and ensure the
application of such payments to the trusts (the servicer adjusted rating).
Lastly, to arrive at the rating on the notes, the servicer
adjusted rating is further adjusted to within three notches of the lowest
rated state or annuity provider associated with the securitized pool of
lottery receivables. This adjustment is performed since a default
on any of the underlying lottery receivables, although considered
remote, will result in a principal reduction on the ABS notes since
the transaction lacks any overcollateralization and has no other loss
absorbing mechanism to cover losses on the lottery receivables.
ADDITIONAL RESEARCH
The original press release for the above transactions is available on
moodys.com.
New York
Suilan Mo-Escowitz
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Amelia (Amy) Tobey
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's placed two lottery receivables asset backed notes issued by the Tekoa Lottery Trust and the Fernwood Lottery Trust on review for possible downgrade
No Related Data.
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