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Rating Action:

Moody's rates second series from NuCO2 whole business securitization issuer

30 Dec 2010

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
No Related Data.
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