New York, August 26, 2010 -- Moody's Investors Service announced today the following rating action
on Mistletoe Orso Trust 2, a collateralized debt obligation transaction
(the "Corporate Collateralized Synthetic Obligation" or "CSO") referencing
a static portfolio of 100 synthetic credit corporate exposures.
$50,000,000 Trust 2 Certificates due March 20,
2012, Upgraded to Caa1 (sf); previously on September 4,
2009 Downgraded to Caa3 (sf)
The CSO notes have a remaining life of 1.6 years. The underlying
portfolio of synthetic credit corporate securities are both high-yield
and investment grade, referencing senior unsecured and subordinated
bonds. The CSO is backed by $50MM of Bayerische Landesbank
Senior Medium-Term Notes (Series F, FRN due 3/20/2012),
Moody's explained that the rating action taken today is the result of
the shortened time to maturity of the CSO and a substantial level of credit
enhancement remaining. Offsetting these positive factors is the
low but stabilizing credit quality of the reference portfolio.
The CSO has 1.6 years left to its remaining life and a credit enhancement
of $136.8M, equivalent to 7.3% of subordination
down from the original 12.3% following past credit events.
The 10 year weighted average rating factor (WARF) of the portfolio is
2,460, equivalent to B2. This compares to a 10-year
WARF of 2,370 from the last rating review, and a 10-year
WARF of 2,435 from using MIRs. There has been no additional
credit event since the last rating action, and no additional downgrade
of reference entities to C/Ca.
Moody's rating action factors in the modeling result of a number
of sensitivity analyses:
(1) Time to maturity -- The committee has reviewed the impact of
a scenario consisting of reducing the maturity by 6 months, keeping
all other things equal. Reducing the maturity of the transaction
generated a result that is 1 notch above the one modeled under the base
(2) Potential defaults -- A sensitivity analysis consisting of defaulting
all entities rated Caa3 and below was done. This run generated
an expected loss that is 1 notch below the one modeled under the base
(3) Sector-wide weakening -- A sensitivity analysis consisting
of notching down by 1 all the entities in the Banking, Finance,
and Real Estate sectors was done. This run generated an expected
loss that is 1 notch below the one modeled under the base case.
(4) Sector-wide weakening coupled with passage of time --
An additional sensitivity analysis was run to test the effects of both
a credit deterioration and the reduction of maturity by taking scenario
(3) above and reducing the time to maturity by 6 months. This run
did not show any material impact compared to the base case.
(5) Finally, Moody's rating action takes into account the
result of a sensitivity analysis consisting of modeling CDS spread implied
rating (Market Implied Ratings or "MIRs") in place of the corporate fundamental
rating to derive the default probability of each corporate name in the
reference portfolio. The gap between a MIR and a Moody's
corporate fundamental rating is an indicator of the extent of the divergence
of credit view between Moody's and the market on each referenced
name in the CSO portfolio. This run did not show any material impact
compared to the base case.
In addition to the quantitative factors that are explicitly modeled,
qualitative factors are part of rating committee considerations.
These qualitative factors include the structural protections in each transaction,
the recent deal performance in the current market environment, 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 methodology used in rating Mistletoe Orso Trust 2 was "Moody's
Approach to Corporate Collateralized Synthetic Obligations" rating
methodology published in September 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. Moody's analysis
for this transaction is based on the CDOROM v2.6. This model
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
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Corporate Synthetic Obligations",
key model inputs used by Moody's in its analysis may be different from
the manager/arranger'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".
Moody's did not run a separate loss and cash flow analysis other
than the one already done using the CDOROM model. For a description
of the analysis, refer to the methodology and the CDOROM user guide
on Moody's website.
Moody's also ran various stress scenarios including defaulting all reference
entities modeled at Caa2 and below. Nine additional entities were
thus defaulted, bringing the total number of defaults in the portfolio
to 19. The run generated an expected loss consistent with a rating
three notches below the base case modeling. Moody's analysis
also accounts for the risk of the swap counterparty defaulting and the
risk of an early termination due to the default of the issuer of the collateral.
The effect of these additional risk was not material compared to the risk
coming from the reference portfolio.
Moody's analysis of CSOs is subject to uncertainties, the
primary sources of which includes complexity, governance and leverage.
Although the CDOROM model captures many of the dynamics of the Corporate
CSO structure, it remains a simplification of the complex reality.
Of greatest concern are (a) variations over time in default rates for
instruments with a given rating, (b) variations in recovery rates
for instruments with particular seniority/security characteristics and
(c) uncertainty about the default and recovery correlations characteristics
of the reference pool. Similarly on the legal/structural side,
the legal analysis although typically based in part on opinions (and sometimes
interpretations) of legal experts at the time of issuance, is still
subject to potential changes in law, case law and the interpretations
of courts and (in some cases) regulatory authorities. The performance
of this CSO is also dependent on on-going decisions made by one
or several parties, including the Manager and the Trustee.
Although the impact of these decisions is mitigated by structural constraints,
anticipating the quality of these decisions necessarily introduces some
level of uncertainty in our assumptions. Given the tranched nature
of Corporate CSO liabilities, rating transitions in the reference
pool may have leveraged rating implications for the ratings of the Corporate
CSO liabilities, thus leading to a high degree of volatility.
All else being equal, the volatility is likely to be higher for
more junior or thinner liabilities.
The base case scenario modeled fits into the central macroeconomic scenario
predicted by Moody's of a sluggish recovery scenario of the corporate
universe. Should macroeconomics conditions evolves towards a more
severe scenario such as a double dip recession, the CSO rating will
likely be downgraded to an extent depending on the expected severity of
the worsening conditions.
Information sources used to prepare the credit rating are the following:
parties involved in the rating, parties not involved in the rating,
and public 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.
In addition, Moody's publishes a weekly summary of structured finance
credit, ratings and methodologies, available to all registered
users of our website, at www.moodys.com/SFQuickCheck.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit 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.
MD - Structured Finance
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades CSO note issued by Mistletoe Orso Trust 2
250 Greenwich Street
New York, NY 10007