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Rating Action:

Moody's upgrade the ratings of CBO notes issued by Valeo Investment Grade CDO II Ltd.

08 Apr 2011

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).

RATINGS RATIONALE

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 guarantors."

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 2.3.2.1 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 equal:

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 value.

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

REGULATORY DISCLOSURES

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.

New York
Yasmine Mahdavi
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Yu Sun
VP - Senior Credit Officer
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 upgrade the ratings of CBO notes issued by Valeo Investment Grade CDO II Ltd.
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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