New York, December 30, 2010 -- Moody's Investors Service assigned the ratings of Baa2 on September
29, 2010 to the Series 2010-1 Senior Notes, Class A-1
(Series 2010-1 Senior Notes) issued by NuCO2 Funding LLC (together
with certain co-issuers, the Issuer). The Issuer is
a subsidiary of NuCO2 Florida Inc. (Sponsor and Master Manager),
which in turn is a subsidiary of Nu CO2 Inc. This transaction is
the second issuance from the Issuer under a whole business securitization
structure. The Series 2010-1 Senior Notes have an expected
final maturity in June 2015 and a legal final maturity in June 2040.
In conjunction with the new issuance, Moody's also stated
that there was no impact on its Baa2 rating of the existing Series 2008-1
Class A-1, A-2 and A-3 Senior Notes (Series
2008-1 Senior Notes, and together with the Series 2010-1
Senior Notes, the Senior Notes). The Sponsor's primary
business, conducted through the Issuer, is providing beverage
grade carbon dioxide (CO2) and equipment for storage and dispensing thereof,
to vendors of carbonated fountain beverages including quick service restaurants,
convenience stores, theaters and event venues nationally.
The complete rating action is as follows:
Issuer: NuCO2 Funding LLC, Series 2010-1
Senior Notes, Cl. A-1, Assigned Baa2 (sf)
RATING RATIONALE
The Senior Notes are collateralized by essentially all of the tangible
and intangible assets comprising the business of the Issuer on a pari
passu basis. The ratings on the Senior Notes are based primarily
on the following factors: (i) stable cash flows anticipated to be
generated by the securitized assets, consisting primarily of a revolving
highly diversified pool of equipment lease and carbon dioxide supply contracts
and agreements entered into with chain and independent quick service restaurants,
convenience stores and other establishments serving carbonated fountain
beverages to consumers; and the associated equipment installed on
premises; (ii) expected stable long-term demand for carbonated
fountain beverages; (iii) market share, business model and
competitive position of the Issuer as managed by the Sponsor, which
represents the only national provider of Bulk CO2 to the fountain beverage
industry; (iv) payment structure including early amortization events
which provide for early termination of the five-year interest only
period, and turbo structure which applies all available cash flow
after payment of operating expenses and interest on the Senior Notes to
the payment of principal pro rata among the Senior Notes; (v) liquid
credit enhancement in the form of cash in a reserve account sufficient
to cover six months of interest on the aggregate outstanding Senior Notes,
subject to adjustment thereafter, funded at closing from proceeds
and from time to time thereafter from excess cash flow and/or equity contributions
from the Sponsor; (vi) experience and expertise of the Sponsor as
master manager; (vii) presence of administrative agent and backup
manager from date of closing to provide ongoing transaction oversight
and to mitigate operational risks relating to the managerial responsibilities
of the Sponsor; and (viii) legal structure intended to isolate the
operating risk associated with performing services under the contracts
and agreements from the bankruptcy risk of the Sponsor.
The principal methodology used in rating the notes is described below.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website. Additional
research is available on http://www.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
instruments in this transaction.
V-SCORE AND PARAMETER SENSITIVITIES
Moody's V Score. The V Score for this transaction is Medium-High.
The V Score indicates "Medium-High" 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-High, significant deviations
from 'Medium' within the individual categories include the
following: transaction complexity risk, which is judged to
be medium-high; legal, regulatory and other risks,
which is medium-high due to the limited history of whole business
securitization structures and lack of legal test; alignment of interests
risk which is low, due to the totality of the collateral package
and the substantial amount of business value in excess of the debt;
issuer historic performance variability, which is medium-low
based on historical performance; ongoing securitization performance
disclosure, which is medium-low based on completeness of
ongoing reporting; and market value sensitivity, which is medium-low
due to low exposure to asset liquidation events giving rise to market
value risk, since the rated notes are repaid via cash flow in almost
any scenario.
Moody's Parameter Sensitivities. We analyzed the potential model-indicated
rating impact under different stress scenarios for two key variables:
(a) likelihood of an economic transformative event, and (b) impact
of servicer default. For (a), an economic transformative
event is an event beyond the control of the manager, the occurrence
of which is posited as a possibility without specifying any particular
mechanism or cause, which would create a three-year sustained
spike in attrition of 10% per year, and permanently increase
costs and reduce operating margins by 15% of revenues. The
likelihood of the event is specified by reference to Moody's rating
tables, and in the base case is Ba1 and thus we stress this variable
by lowering the assumed rating, which results in higher frequency,
to B1 and B3. For (b), the precise impact of a servicer default
is not known but in the base case the reduction in renewal rate is assumed
to be uniformly distributed with parameters (10%, 20%)
while the attrition rate is assumed to follow a triangular distribution
with minimum, mode and maximum of 0%, 2% and
5% (whereas before default the contract attrition fluctuates positively
and negatively around zero). We stress the impact of a servicer
default by assuming greater declines in renewal rates and greater increases
in attrition. Therefore the parameter sensitivity stress results
show that the initial Baa2 might change as follows: (i) with an
economic transformative event likelihood assumption of Ba1, the
Baa2 initial rating is Baa2 in base case when the parameters for renewal
haircut and attrition rate are (10%, 20%) and (0,
2%, 5%) respectively, and would remain Baa2
in a stress case when the renewal rates and attribution rate both increased
by 10 percentage point from the base case, but would migrate to
Ba1 in a stress case when renewal rates and attrition rate are both increased
by 15 percentage point from the base case; (ii) with an economic
transformative event likelihood assumption of B1, the Baa2 initial
rating would remain Baa2 in base case when the parameters for renewal
haircut and attrition rate are (10%, 20%) and (0,
2%, 5%) respectively, and would move to Baa3
and Ba2, respectively, in stress cases when the renewal rates
and attribution rate are both increased by 10 and 15 percentage points
respectively from the base case; (iii) with an economic transformative
event likelihood assumption of B3, the Baa2 initial rating would
remain Baa2 in base case when the parameters for renewal haircut and attrition
rate are (10%, 20%) and (0, 2%,
5%) respectively, and would move to Ba1 and B1 in stress
cases when the renewal rates and attribution rate are both increased by
10 and 15 percentage points respectively from the base case.
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.
PRINCIPAL METHODOLOGY
Moody's analyzes cash flows of the proposed transaction and evaluates
their sufficiency to make timely interest payments on the notes and repay
the principal by the legal maturity date using a simulation-based
approach. We identify key drivers of the cash flows and estimate
their expected value over the course of the transaction as well as the
probability distribution around that value. We derive expected
revenues and expenses and distributions based on the analysis of historical
performance trends of the collateral business. In this case,
Moody's analyzed the transaction utilizing a cash flow model which generates
cash flows for the business which are then fed into the securitized issuance
structure. The expense base was allocated into fixed and variable
components as previously described. Variables were then inserted
into the model to simulate the
potential dynamics of the business. The yield on the resulting
simulated cash flows of the Senior Obligations was calculated for each
of thousands of simulation iterations, and the average yield reduction
relative to the promised coupon for the rated notes was determined.
The average yield reduction is then compared to Moody's benchmark reduction
for the requested rating.
Key assumptions and variables simulated included the following:
(A) Contract growth rates: (i) annual renewal rates for maturing
contracts assumed to be a triangular distribution ranging from 5%
to 15% non-renewal (ii) annual net attrition rates (attrition
for existing non-maturing contracts plus growth for new contracts)
ranging from -2% (shrinkage) to +3% (growth)
with a no credit for or a severe haircut to contractual early termination
payments; (B) Product usage: growth of 1% per annum;
(C) Product pricing: zero growth in CPI/PPI (inflation tends to
benefit cash flows due to contract provisions); (D) Transaction life:
despite the 30-year legal final, no credit was given to cash
flows after year 18; however a stressed liquidation value was assigned
to the related Bulk CO2 tanks in year 18 in light of their tangible asset
value.
Two additional default variables were overlaid to these variables:
(A) Sponsor risk: the Sponsor was assumed to default at any time
during the first ten years of the transaction, with a probability
consistent with a low non-investment grade rating. Upon
the occurrence of default and thereafter, the distribution of annual
net attrition rates is reduced by a range of -5% to zero
(i.e., no net growth, only shrinkage or flatline)
for the remainder of the transaction life. (B) Industry risk:
positing that other events might possibly occur unrelated to a Sponsor
default, an industry risk event was added which was assumed to occur
with a probability consistent with a high non- investment rating.
Upon the occurrence of this event, net attrition is assumed to spike
to 10% each year for three straight years. In addition,
the securitized cash flow margin on revenues is assumed to permanently
decrease by 15% (percentage points of revenue).
The results in terms of reduction in average yield were consistent with
the rating. Several of the key stresses and assumptions were tested.
Moody's additionally considered default frequency as well as traditional
metrics such as leverage multiples (particularly debt to securitized cash
flow) and coverage ratios (particularly the debt service coverage ratio
as reported).
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, parties
not involved in the ratings, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the 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
Everett Rutan
Senior Vice President
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 rates second series from NuCO2 whole business securitization issuer
