Approximately USD 376 million of debt securities affected
New York, March 24, 2011 -- Moody's Investors Service announced today that it has downgraded the ratings
on the following notes issued by Taberna Preferred Funding VII,
Ltd.
U.S.$350,000,000 Class A-1LA Floating
Rate Notes Due February 2037, (current balance of $230,954,118.58),
Downgraded to Caa1 (sf); previously on April 28, 2010 Downgraded
to B3 (sf);
U.S.$120,000,000 Class A-1LB Floating
Rate Notes Due February 2037 (current balance of $ 120,000,000),
Downgraded to Ca (sf); previously on April 28, 2010 Downgraded
to Caa2 (sf);
U.S.$25,000,000 Class A-2LA Floating
Rate Notes Due February 2037 (current balance of$25,000,000),
Downgraded to C (sf); previously on April 28, 2010 Downgraded
to Ca (sf)
RATINGS RATIONALE
Taberna Preferred Funding VII, Ltd., issued on September
28, 2006, is a collateral debt obligation backed by a portfolio
of CMBS, CRE CDOs and REIT trust preferred securities (the 'TRUP
CDO'). On April 28, 2010, the last rating action date,
Moody's downgraded four classes of notes, which were the result
of the application of revised and updated key modeling assumptions,
as well as the deterioration in the credit quality of the transaction's
underlying portfolio.
Moody's indicated that the downgrade action on the notes are primarily
the result of increase of the assumed defaulted amount. The assumed
defaulted amount now totals $201 million (37.6% of
the portfolio). All the assumed defaulted assets are carried at
zero recovery in our analysis. The remaining assets in the portfolio
have seen a slight improvement in their Weighted Average Rating Factor
(WARF) to 3757 from 4269 as of the last rating action. The current
model WARF accounts for a credit estimate stress, described in Moody's
Rating Methodology "Updated Approach to the Usage of Credit Estimates
in rated Transactions", October 2009.
The par loss due to the increase in the assumed defaulted amount has resulted
in loss of overcollateralization for the affected tranches and an increase
in the expected losses to the tranches since the last rating action.
As of the latest trustee report dated February 28, 2011, the
Senior Overcollateralization Test is reported at 108.04%
(limit 125%), versus trustee reported levels used in the
last rating action of 115.60%, from the report dated
as of March 31, 2010. Moody's has noticed that the
transaction continues to be negatively impacted by large imbalanced fixed-floating
interest rate swaps, that results in significant payments to the
hedge counterparty. In this case, the magnitude of the imbalance
between the cash inflows and outflows due to the presence of over-hedging
has been magnified by the increase in the defaulted assets in the collateral
portfolio. In its analysis, Moody's has accounted for
the reduction of cash available to pay the notes due to the significant
swap payments to the hedge counterparty.
The rating action also takes into consideration that the transaction triggered
an Event of Default on May 20, 2010 arising from the failure to
maintain the Class A-2L Overcollateralization Ratio at or greater
than 100%. The trustee also issued a notice, dated
as of July 7, 2010 that a majority of the Controlling Class directed
the Trustee to declare the principal of all of the Notes to be immediately
due and payable. The Event of Default is continuing.
In our analysis, we assume that the WAL of the portfolio is approximately
20.1years.
The portfolio of this TRUP CDO is composed of CMBS securities and trust
preferred securities issued by REITs that are generally not publicly rated
by Moody's. To evaluate their credit quality, Moody's derives
credit scores for these non-publicly rated assets and evaluates
the sensitivity of the rated transactions to their volatility, as
described in Moody's Rating Methodology "Updated Approach to the Usage
of Credit Estimates in Rated Transactions", October 2009.
The effect of the stress testing of these credit scores varies between
one and three notches, depending on the total amount and relative
size of these securities in the collateral pool.
Moody's performed a number of sensitivity analyses of the results to some
of the key factors driving the ratings. The sensitivity of the
model results to increases and decreases in the WARF (representing a slight
improvement and a slight deterioration of the credit quality of the collateral
pool) was examined. If WARF is increased by 670 points from the
base case of 3555, the model results in an expected loss that is
one notch worse than the result of the base case for Class A-1
Notes. If the WARF is decreased by 707 points, expected losses
are one notch better than the base case results. Additionally,
the effect of using loss distribution generated from CDOROM was also tested
resulting in an expected loss that did not create any rating movement
for the rated notes.
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
Moody's considers as well the structural protections in this transaction,
the recent deal performance in the current market conditions, the
legal environment, and specific documentation features. All
information available to rating committees, including macroeconomic
forecasts, input from other Moody's analytical groups, market
factors and judgments regarding the nature and severity of credit stress
on the transactions, may influence the final rating decision.
The principal methodologies used in this rating were "Moody's Approach
to Rating U.S. REIT CDOs" published in April 2010,
and "Updated Approach to the Usage of Credit Estimates in Rated Transactions"
published in October 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Due to the impact of revised and updated key assumptions referenced in
these rating methodologies, key model inputs used by Moody's in
its analysis, such as par, WARF, Moody's Asset Correlation,
and weighted average recovery rate, may be different from the trustee's
reported numbers. In particular, rating assumptions for all
publicly rated corporate credits in the underlying portfolio have been
adjusted for "Review for Possible Downgrade", "Review for Possible
Upgrade", or "Negative Outlook".
The transaction's portfolio was modeled, according to our rating
approach, using CDOROM v.2.8 to develop the default
distribution from which the Moody's Asset Correlation parameter was obtained.
This parameter was then used as an input in a cash flow model using CDOEdge.
CDOROM v.2.8 is available on moodys.com under Products
and Solutions -- Analytical models, upon return of
a signed free license agreement.
Moody's Investors Service did not receive or take into account a third
party due diligence report on the underlying assets or financial instruments
related to the monitoring of this transaction in the past six months.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information, and confidential
and proprietary Moody's Analytics' information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
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
Sange Lama
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Rodrigo Araya
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 takes rating action on notes issued by Taberna Preferred Funding VII, Ltd., a REIT TRUP CDO
