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Rating Action:

Moody's takes rating actions on structured settlement securitizations

17 May 2011

Approximately $1.1 billion of asset-backed securities affected.

New York, May 17, 2011 -- Moody's Investors Service took rating actions on nineteen classes of securitized notes from twelve transactions backed by the future payments owed under litigation settlement agreements, commonly known as structured settlements. The actions were taken as a correction of errors in the models used to rate these transactions. As a result of revisiting the transactions under the corrected models and assumptions, 14 tranches were upgraded, two downgraded, and three were placed on review for possible downgrade, pending potential restructuring. Upgrades and downgrades ranged from one to two notches.

RATIONALE

Today's rating actions are primarily a consequence of correcting errors in the cash flow model used to analyze and rate structured settlement securitizations. Specifically, Moody's determined that the formulas in its model used to create correlation among the presumed defaults of obligors in structured settlements were incorrect. While correcting errors in the formulas, we have also now adopted for structured settlements the same asset correlation framework used by Moody's in rating corporate structured products, with parameters adjusted to reflect the specific patterns of the life insurance industry (see Principal Methodology, below, for more information). In addition, Moody's found and corrected errors in the modeling of cash flow allocation and applicable discount rates. It should be noted that model-generated output is one among several important factors considered by Moody's in rating these notes.

Moody's has re-analyzed all of the Moody's-rated structured settlement notes outstanding. Ratings of the nineteen classes listed below were affected by the review.

The complete rating actions are as follows:

Issuer: 321 Henderson Receivables I LLC

Series 2004-A, Class A-1 Notes, Upgrade to Aa3 (sf); Previously on November 24, 2010 A1 (sf) placed on review for possible upgrade;

Series 2004-A, Class A-2 Notes, Upgrade to A1 (sf); Previously on November 24, 2010 A2 (sf) placed on review for possible upgrade;

Series 2005-1, Class A-1 Notes, Upgrade to Aa3 (sf); Previously on November 24, 2010 A2 (sf) placed on review for possible upgrade;

Series 2005-1, Class A-2 Notes, Upgrade to A1 (sf); Previously on November 24, 2010 A3 (sf) placed on review for possible upgrade;

Issuer: 321 Henderson Receivables II LLC

Series 2006-1, Class A-1 Notes, Upgrade to A1 (sf); Previously on April 8, 2009 confirmed A2 (sf) rating

Series 2006-1, Class A-2 Notes, Downgrade to Baa1 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to A3 (sf)

Series 2006-2, Class A-1 Notes, Upgrade to A1 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to A3 (sf)

Series 2006-2, Class A-2 Notes, Upgrade to A2 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to Baa1 (sf)

Series 2006-3, Class A-1 Notes, Upgrade to A1 (sf); Previously on April 8, 2009 confirmed A2 (sf)

Series 2006-3, Class A-2 Notes, Upgrade to A2 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to A3 (sf)

Series 2006-4, Class A-1 Notes, Upgrade to A1 (sf); Previously on April 8, 2009 confirmed A2 (sf)

Series 2006-4, Class A-2 Notes, Upgrade to A2 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to A3 (sf)

Series 2007-1, Class A-2 Notes, Downgrade to Baa1 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to A3 (sf)

Series 2007-2, Class A-1 Notes, Upgrade to A2 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to A3 (sf)

Series 2007-2, Class A-2 Notes, Upgrade to A3 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to Baa1 (sf)

Series 2007-3, Class A Notes, Upgrade to A3 (sf); Previously on April 8, 2009 downgraded from A2 (sf) to Baa1 (sf)

Issuer: 321 Henderson Receivables VI LLC

Series 2010-1, Class A Notes, Aaa (sf) Placed on review for possible downgrade; Previously on April 27, 2010 assigned definitive rating of Aaa (sf)

Issuer: J.G. Wentworth XXI LLC

Series 2010-2, Class A Notes, Aaa (sf) Placed on review for possible downgrade; Previously on August 13, 2010 assigned definitive rating of Aaa (sf)

Issuer: J.G. Wentworth XXII LLC

Series 2010-3 Class A Notes, Aaa (sf) Placed on review for possible downgrade; previously on November 5, 2010 assigned definitive rating of Aaa (sf)

PRINCIPAL METHODOLOGY

In assigning credit ratings on structured settlement-backed notes, Moody's relies on both qualitative and quantitative analysis described in the paragraphs that follow.

Qualitative Analysis

Moody's qualitative analysis focuses primarily on evaluating (i) the servicer's capacity to fulfill its duties and whether the servicing arrangement adequately reduces the likelihood and extent of a servicing disruption; (ii) cash management, and (iii) the extent of payment diversion risk.

Moody's evaluates a number of factors regarding servicing, including: the effectiveness of the servicer's systems to flag future dates when large payments are due and the servicer's ability to quickly detect inappropriately allocated payments and to act on improperly missed or diverted payments. Moody's also evaluates the risk of servicing disruption. The risk of servicing disruption tends to be low when servicing is provided by an experienced, stable, financially strong servicer, or the transaction provides for backup servicing arrangements that would likely lead to a smooth, quick transfer of servicing to another entity if needed.

Structured settlement securitizations benefit from strong legal protections; however, funds may be diverted from investors in connection with a sponsor's bankruptcy, or as a result of either fraud by the claimants or administrative error. Moody's assessment of that risk focuses on evaluating the extent to which obligors' payments are isolated from the sponsor by lock box arrangements or other means and the servicer's oversight over incoming payments to ensure they are in line with scheduled payments.

For more information on Moody's views regarding operational risks such as potential servicing disruption and cash management, see "Global Structured Finance Operational Risk Request for Comment," May 6, 2010.

Payment diversion risk arises from settlement claimants attempting to divert payments from the securitization. This risk is low because the vast majority of the receivables in the analyzed transactions (based on discounted balance of the securitized receivables at the time of each transaction's closing date) consisted of court-ordered transfers of structured settlement receivables. Court-ordered structured settlements consist of receivables created after the enactment of the Victims of Terrorism Tax Relief Act of 2001 (the Act). The Act stipulates that the sale of a structured settlement receivable must be subject to a court order under which the structured settlement obligors are directed by the court to remit payments to a given party. Therefore, the securitization's right to receive settlement payments is backed by strong legal protections.

Quantitative Analysis

Moody's used a Monte Carlo analysis to simulate no less than 10,000 different scenarios of the structured settlement pool performance. The modeled cash-flows are then used to pay down the Notes and to observe the probabilities and severities of defaults for the different classes of Notes. Specifically, the IRR of the simulated ABS cash flows is calculated for each iteration, and then compared to the promised IRR (coupon) to measure the reduction in IRR. If there is a principal loss, this loss is noted and the amount is logged. After completing the simulations, an average reduction in IRR, an average frequency of loss and an average loss (expected loss) is calculated. From these results model-indicated ratings are determined using the appropriate Moody's idealized reference tables. Of these measures, the primary driver to the rating outcome is the IRR reduction.

The Monte Carlo simulation model uses asset level information about the pool of securitized receivables including the credit quality of the obligors. The model relies on identifying key variables important to the performance of the assets and on assigning probability distributions for these variables. The key variables include the probability of default for the obligors making payments under the securitized receivables, the recovery rate on the receivables upon the default of an obligor, the correlation between obligors' defaults, and losses. In defining the parameters for the variables, Moody's relied on a combination of historical data, market knowledge on current and future trends in the insurance industry and the sub-servicer's own experience.

The following is a more detailed explanation of the key variables and our assumptions for each:

1. The obligor mix in these transactions consists of insurance companies (primarily life insurance companies) which are typically highly rated. For probability of default assumptions, Moody's used the actual credit ratings for the obligor if available; for obligors for which Moody's credit rating was not available, a probability of default consistent with a Ba rating level was assumed. Finally, obligors which are part of the same insurance group were treated as a single obligor.

2. Moody's recovery assumptions for the structured settlements of defaulted obligors range from 35% to 75%. For most investment grade rated life insurers, the distribution is centered toward the upper end of that range.

3. For obligor correlation, Moody's assumes that each individual company's default is correlated with all other obligors in the pool, reflecting the fact that they are all in the life insurance industry. This approach is consistent with the correlation approach Moody's uses to evaluate other pools of corporate credit. Generally speaking, Moody's employs single industry correlation assumptions that range from 3% to 50%, depending on the industry, the nature of the obligation and the geographic dispersion of the obligors. Moody's uses a correlation assumption of 25% in analyzing the behavior of pools of insurance company obligors in structured settlements. This level of correlation results in the default of approximately half of the obligors in a typical pool within ten years, as compared to approximately one sixth of the pool with no correlation. In arriving at the 25% correlation assumption, Moody's considered the fact that the securitized obligations are claims we view on par with insurance policies, rather than corporate debt obligations, and the relatively low observed correlation among life insurance companies. Previously, Moody's intended to correlate obligor defaults to a single industry random variable, which does not account for cross-correlation among obligors in the pool. That methodology included a sensitivity analysis using correlation level assumptions of 50%, 75% and 100%. As these levels were established using formulas for correlation that were determined to be incorrect, we also determined that the correlation assumption needed to be adjusted in the context of the newly adopted correlation framework. The new correlation assumption of 25% is a result of that review.

4. Direct collateral losses, not associated with failures of insurance companies defaulting on their obligations, were assumed to be less than 2%. Though historically losses on court-ordered structured settlements have been very low (for example, totaling less than 25 basis points cumulatively since 2002 for one leading industry participant), losses for a specific transaction may be higher than the historical levels. Losses may stem from bankruptcy of claimant, fraud, administrative error by the originator or obligor or other reasons.

5. Overall, we assess the sufficiency of the available credit enhancement in light of the various structural features of the transaction.

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. From time to time, Moody's may, if warranted, change these expectations.

Other methodologies and factors that may have been considered in the process of rating this issue can be found at www.moodys.com in the Ratings Methodologies subdirectory within the Rating Methodologies and Performance directory.

REGULATORY DISCLOSURES

Information sources used to prepare the credit ratings are the following: parties involved in the ratings, 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 issuer 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
Gregory J. Gemson
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William Black
MD - Structured Finance
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 actions on structured settlement securitizations
No Related Data.
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