US$125 million of debt securities affected
New York, April 08, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of following notes issued by Valeo Investment Grade CDO II Ltd:
$443,750,000 Class A-1 Floating Rate Senior
Subordinated Notes Due June 1, 2013 (current balance $83,948,520),
Upgraded to Aa1 (sf); previously on November 12, 2009 Confirmed
at Aa3 (sf);
$18,500,000 Class A-2 Floating Rate Senior Subordinated
Notes Due June 1, 2013, Upgraded to Baa2 (sf); previously
on May 20, 2009 Downgraded to B3 (sf);
$13,750,000 Class B-1 Floating Rate Senior Subordinated
Notes Due June 1, 2013, Upgraded to Caa3 (sf); previously
on May 20, 2009 Downgraded to Ca (sf);
$9,000,000 Class B-2 8.697% Fixed
Rate Senior Subordinated Notes Due June 1, 2013, Upgraded
to Caa3 (sf); previously on May 20, 2009 Downgraded to Ca (sf).
According to Moody's, the rating actions taken on the notes result
primarily from the deleveraging of the Class A-1 Notes, which
have been paid down by approximately 65% or $160 million
since May 2009. As a result of the deleveraging, the Senior
Overcollateralization Ratio has increased since the 2009 rating action.
As of the trustee report dated February 22, 2011, the Senior
Overcollateralization Ratio Test is reported at 124.41 versus 110.95.
It is currently in compliance.
The rating on the Class A-1 Notes reflects the actual underlying
rating of the Class A-1 Notes. This underlying rating is
based solely on the intrinsic credit quality of the Class A-1 Notes
in the absence of the guarantee from Assured Guaranty Municipal Corp.
whose insurance financial strength rating is currently Aa3. The
above action on the Class A-1 Notes is a result of, and is
consistent with, Moody's modified approach to rating structured
finance securities wrapped by financial guarantors as described in the
press release dated November 10, 2008, titled "Moody's modifies
approach to rating structured finance securities wrapped by financial
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Collateralized Loan Obligations" and "Annual
Sector Review (2009): Global CLOs," key model inputs used
by Moody's in its analysis, such as par, weighted average
rating factor, diversity score, and weighted average recovery
rate, may be different from the trustee's reported numbers.
In its base case, Moody's analyzed the underlying collateral pool
to have a performing par balance of $91 million, defaulted
par of $4 million, a weighted average default probability
of 13% (implying a WARF of 3375), a weighted average recovery
rate upon default of 23% and a diversity score of 13. These
default and recovery properties of the collateral pool are incorporated
in cash flow model analysis where they are subject to stresses as a function
of the target rating of each CLO liability being reviewed. The
default probability is derived from the credit quality of the collateral
pool and Moody's expectation of the remaining life of the collateral pool.
The average recovery rate to be realized on future defaults is based primarily
on the seniority of the assets in the collateral pool. In each
case, historical and market performance trends, and collateral
manager latitude for trading the collateral are also factors.
Valeo Investment Grade CDO II Ltd., issued May 2001,
is a collateralized bond obligation backed primarily by a portfolio of
senior unsecured bonds. The trustee reports 23 obligors and a diversity
score of 15.
The principal methodology used in these ratings was "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009.
This publication incorporates rating criteria that apply to both collateralized
loan obligations and collateralized bond obligations.
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.
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 18.104.22.168 of the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009. In addition, due to the low diversity of
the collateral pool, CDOROM 2.8 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
In addition to the base case analysis described above, Moody's also
performed sensitivity analyses to test the impact on all rated notes of
various default probabilities. Below is a summary of the impact
of different default probabilities (expressed in terms of WARF levels)
on all rated notes (shown in terms of the number of notches' difference
versus the current model output, where a positive difference corresponds
to lower expected loss), assuming that all other factors are held
Moody's Adjusted WARF - 20% (2700)
Class A-1: +2
Class A-2: +2
Class B-1: +1
Class B-2: +1
Moody's Adjusted WARF +20% (4050)
Class A-1: -2
Class A-2: -1
Class B-1: 0
Class B-2: 0
Moody's notes that this transaction is subject to a high level of macroeconomic
uncertainty, as evidenced by 1) uncertainties of credit conditions
in the general economy and 2) the large concentration of speculative-grade
debt maturing between 2012 and 2014 which may create challenges for issuers
to refinance. CDO notes' performance may also be impacted by 1)
the manager's investment strategy and behavior and 2) divergence in legal
interpretation of CDO documentation by different transactional parties
due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Deleveraging: The amount and pace of deleveraging from principal
proceeds is uncertain. Deleveraging may accelerate due to high
prepayment levels in the bond market and/or collateral sales by the manager,
which may have significant impact on the notes' ratings.
2) Recovery of defaulted assets: Market value fluctuations in defaulted
assets reported by the trustee and those assumed to be defaulted by Moody's
may create volatility in the deal's overcollateralization levels.
Further, the timing of recoveries and the manager's decision to
work out versus sell defaulted assets create additional uncertainties.
Moody's analyzed defaulted recoveries assuming the lower of the market
price and the recovery rate in order to account for potential volatility
in market prices.
3) Lack of portfolio granularity: Due to the deal's low diversity
score and lack of granularity, Moody's supplemented its typical
Binomial Expansion Technique analysis with a simulated default distribution
using Moody's CDOROMTM software and/or individual scenario analysis.
4) Long-dated assets: The presence of assets that mature
beyond the CBO's legal maturity date exposes the deal to liquidation
risk on those assets. Moody's assumes an asset's terminal
value upon liquidation at maturity to be equal to the lower of an assumed
liquidation value (depending on the extent to which the asset's
maturity lags that of the liabilities) and the asset's current market
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
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service 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.
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrade the ratings of CBO notes issued by Valeo Investment Grade CDO II Ltd.
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