New York, December 08, 2010 -- Moody's Investors Service announced today that it has downgraded the following
notes issued by Kodiak CDO II Ltd.
U.S. $338,000,000 Class A-1 Senior
Secured Floating Rate Notes Due 2042, Downgraded to B2 (sf);
previously on Apr 9, 2009 Downgraded to Ba1 (sf);
U.S. $53,000,000 Class A-2 Senior
Secured Floating Rate Notes Due 2042, Downgraded to Caa2 (sf);
previously on Apr 9, 2009 Downgraded to Caa1 (sf).
Kodiak CDO II, Ltd., issued on June 29, 2007,
is a collateral debt obligation backed by a portfolio of CMBS securities,
CRE CDOs, and REIT trust preferred securities (the 'TRUP CDO').
On April 9, 2009, the last rating action date, Moody's
downgraded five classes of notes as a 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 downgrades on the notes are primarily the result
of increase of the assumed defaulted amount and Weighted Average Rating
Factor (WARF) of the pool. Since the last rating action,
the assumed defaulted amount has increased by 423%. Cumulative
assumed defaulted amounts now total $184.4 million (24.7%
of the portfolio). All the assumed defaulted assets are carried
at zero recovery in our analysis. The remaining assets in the portfolio
have also suffered credit deterioration, as indicated by the WARF
which increased to 4370. This current 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. WARF assumptions for the last rating action were
3148 for First Scenario and 2948 for Second Scenario, details of
which are explained in the last rating actions' press release.
The par loss due to the increase in the assumed defaulted amount has resulted
in loss of overcollateralization and interest coverage for the affected
tranches. This has led to an increase of their expected losses
since the last rating action. The overcollateralization tests continue
to breach their triggers which have resulted in a diversion of excess
spreads to pay down senior notes. As of the latest trustee report
dated November 1, 2010, the Class A/B Overcollateralization
Test is reported at 114.419%, versus trustee reported
levels from the report dated February 27, 2009 of 131.06%,
which were used during the last rating action. Additionally,
the Class A/B Interest Coverage Test is reported at 134.136%,
versus trustee reported levels of 179.69% as of the last
rating action date.
In Moody's opinion, most U.S. REITs and REOCs have
began to show signs of recovery and the credit fundamentals are stabilizing
for the sector. We also expect relative rating stability for U.S.
CMBS in 2011 as property markets begin to recover.
In our analysis, we assume no prepayments. The WAL of the
portfolio is approximately 32 years.
The portfolio of this 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 to 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 425 points from the
base case of 4370, the model results in an expected loss that is
one notch worse than the result of the base case for Class A1 notes.
If the WARF is decreased by 460 points, expected losses are one
notch better than the base case results. Additionally, the
effects of the actual amortization profiles were tested resulting in an
expected loss that was one notch worse for the Class A-1 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 rating Kodiak CDO II, Ltd.
were "Moody's Approach to Rating U.S. REIT CDOs" published
in April 2010, and as mentioned above, "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.2.6 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.2.6 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 6 months.
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.
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our web site, at www.moodys.com/SFQuickCheck.
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.
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's takes rating actions on TRUP CDO notes issued by Kodiak CDO II, Ltd.
250 Greenwich Street
New York, NY 10007