Approximately $128.6 million of outstanding asset-backed securities affected.
New York, August 13, 2009 -- Moody's Investors Service has placed on review for possible downgrade
the ratings of three series of notes issued by A&K Funding LLC that
are primarily collateralized on a pari passu basis by a single pool of
commission-related fee streams related to bank-owned life
Complete rating actions are as follows:
Issuer: A&K Funding LLC
$60,000,000 (original principal amount) 7.87%
Commercial Asset Backed Notes, Series 2004-A A3 Placed under
Review for Possible Downgrade, previously on April 8, 2004
$30,000,000 (original principal amount) 7.39%
Commercial Asset Backed Notes, Series 2005-A A3 Placed under
Review for Possible Downgrade, previously on April 18, 2005
$53,000,000 (original principal amount) 7.415
% Commercial Asset Backed Notes, Series 2006-A3 A
Placed under Review for Possible Downgrade, previously on November
27, 2006 rated A3
The issuer has no control over any policyholder's decision to surrender
its BOLI policies. If the policies are surrendered, the securitized
fee streams relating to those policies cease.
The notes were placed under review for possible downgrade to allow Moody's
to evaluate whether, in the current highly challenging environment
for financial institutions, the motivations of the policyholders
and their financial stability are consistent with assuming a low likelihood
for surrender. We will analyze the likelihood of the policyholders
surrendering their BOLI policies whether due to a loss of the beneficial
tax treatment on the BOLI policies, the need for liquidity in the
current stressed economic environment, or for other reasons.
In particular, we will evaluate the impact on the securitized cash
flows if a successor bank holding the largest concentration of policies
in the collateral pool surrenders its policies. In 2008 the successor
bank became owner of these policies as a result of an FDIC-assisted
takeover, via an asset purchase, of a distressed formerly
investment grade financial institution. BOLI policies normally
receive favorable tax treatment that makes surrender unlikely.
However, the nature of the successor bank's acquisition of
the BOLI policies (via an asset purchase as opposed to a corporate merger)
may corrupt the favorable BOLI tax treatment unless the successor bank
chooses to petition the Internal Revenue Service for an exemption and
the petition is successful.
When the transactions closed, the probability of a financial institution
surrendering its BOLI was viewed as low because of the adverse tax treatment
associated with surrender. In addition, at closing,
institutions representing significant pool concentrations had high investment
COLLATERAL AND TRANSACTION STRUCTURE
The collateral securing the notes includes the right to receive payment
of (i) certain "servicing fees" arising from, or in
connection with services to be provided by Analect Administrative Services
LLC, a Delaware limited liability company ("Analect U.S."),
and (ii) certain "reinsurance receivables" arising from,
or in obligation assumed by Analect Re (Bermuda) Limited, a Bermuda
long-term insurance company ("Analect Bermuda"),
over a defined period of approximately 30 years from issuance.
The servicing fees and reinsurance receivables (together the "Periodic
Fees") relate to certain life insurance policies sold by Sun Life
Assurance Company of Canada ( U.S.) (Sun Life) to financial
institutions in the U.S.
The policies consist of BOLI policies purchased and owned by various financial
and other institutions, on the lives of its employees (typically
its directors, executives, management and key employees).
Sun Life (Aa3, with a negative outlook), pays the Periodic
Fees as they arise to the issuer. The amount and duration of the
Periodic Fee payments to the issuer depend primarily on (i) the projected
earnings on the cash surrender value of the policies, (ii) mortality
and (iii) surrender of the policies. Of these three factors,
surrender is the most critical since surrender eliminates the portion
of the Periodic Fee Stream associated with the surrendered policy.
The notes were sized at closing based on only the initial thirteen years
of projected Periodic Fee payments. Credit enhancement was effected
due to the inclusion of a full thirty years of Periodic Fee payments in
the collateral, with a corresponding 30-year legal final
maturity. After payment of servicing fees and other transaction
expenses, all cash flow received is applied first to accrued interest
and then the remainder is applied as principal to repay the notes.
SERVICING AND ADMINISTRATION
Analect U.S. acts as the primary servicer. Wells
Fargo Bank, National Association acts as trustee and back up servicer.
Analect U.S., formed on November 18, 1999 is
a wholly-owned subsidiary of Analect LLC, and at the time
of the transactions' closing, was one of the largest BOLI
originators and servicers in the market. Analect U.S.'s
principal executive offices are located Great Neck, NY.
In rating the transaction Moody's used both qualitative and quantitative
analysis. Qualitatively, Moody's analysis focused on the
following key factors: (i) the likelihood of policyholders surrendering
their BOLI policies, including adverse tax consequences triggered
upon surrender; (ii) continuation of the favorable tax treatment
under federal tax law granted to BOLI policy holders; (iii) concentration
and financial stability of policyholders related to the collateral pool;
(iv) expected mortality rates; (v) counterparty risk to Sun Life,
as the sole policy underwriter, for the collateral pool; (vi)
possible Sun Life setoff against the collateral if Analect U.S.
defaults in its servicing performance and the presence of a highly rated
back-up servicer; (vii) the likelihood that the BOLI policies'
complied with the law of insurable interest so that the policies status
as property of the issuer could not be successfully challenged by the
BOLI policies' underlying insurable employees; and (viii) regulatory
oversight and restrictions on BOLI investments.
Quantitatively, Moody's estimates future Periodic Fee cashflows
based on available data concerning cash surrender values and current cash
inflows from the assets, as well as mortality rates and investment
returns. These cashflows were then used to pay down the bonds and
to observe the probability and severity of default under various scenarios.
Other methodologies and factors that may have been considered in the process
of monitoring this issue can also be found in the Credit Policy &
Structured Finance Group
Moody's Investors Service
Moody's reviews for possible downgrade BOLI commission notes issued by A&K Funding LLC
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service