USD 75 million and EUR 14.25 million of debt securities affected
New York, May 27, 2011 -- Moody's Investors Service announced today the following rating actions
on Magnolia Finance II Series 2006-7, a collateralized debt
obligation transaction (the " Collateralized Synthetic Obligation" or
"CSO"). The CSO, issued in 2006, references a portfolio
of corporate loan obligations.
Issuer: Magnolia Finance II Series 2006-7A2
....US$27.5M Class A2 Notes,
Upgraded to Aa1 (sf); previously on Jul 31, 2009 Downgraded
to Aa2 (sf)
Issuer: Magnolia Finance II Series 2006-7B
....US$27.2M Class B Notes,
Upgraded to Aa2 (sf); previously on Jul 31, 2009 Downgraded
to A2 (sf)
Issuer: Magnolia Finance II Series 2006-7C
....US$21M Class C Notes, Upgraded
to A2 (sf); previously on Jul 31, 2009 Downgraded to Baa2 (sf)
Issuer: Magnolia Finance II Series 2006-7D
....EUR14.25M Class D Notes,
Upgraded to Baa1 (sf); previously on Jul 31, 2009 Downgraded
to Ba1 (sf)
Moody's rating actions today are the result of the credit improvement
of the underlying portfolio and the level of credit enhancement remaining
in the transaction.
Since the last rating review in June 2010, the 10-year weighted
average rating factor (WARF) of the portfolio improved from 725 to 688,
equivalent to Ba1, including credit events. The underlying
portfolio is currently rated 97% investment grade. There
are two reference entities with a negative outlook and two entities on
watch for downgrade compared to the previous rating review, where
the deal had nine reference entities with a negative outlook and one that
Since inception, the portfolio has experienced only one credit event
in CIT Group for a loss of subordination of 1.36%,
based on the portfolio notional value at closing.
The current remaining life of the transaction is 2.07 years.
Moody's rating action today factors in a number of sensitivity analyses
and stress scenarios, discussed below.
Results are given in terms of the number of notches' difference versus
the base case, where higher notches correspond to lower expected
losses, and vice-versa:
Market Implied Ratings ("MIRs") are modeled in place
of the corporate fundamental ratings to derive the default probability
of the reference entities in the portfolio. The gap between an
MIR and a Moody's corporate fundamental rating is an indicator of the
extent of the divergence in credit view between Moody's and the market.
The result of this run is comparable to the one of the base case for Class
A3, A2 and C and one notch lower for classes B and D.
Moody's reviews a scenario consisting of reducing the maturity
of the CSO by 6 months, keeping all other parameters constant.
The result of this run is one is comparable to the one of the base case
for Class A3 and one notch higher for classes A2, B, C and
Moody's conducts a sensitivity analysis consisting of notching
down by one the ratings of reference entities in the most referenced industry,
the Finance sector. The result from this run is comparable to the
one modeled under the base case.
Removing the notch-down adjustment on ratings of all reference
entities on negative outlook and/or on watch for downgrade generates a
result that is comparable to the base case for Class A3 and B and one
notch higher for Class A2, C and D.
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 these ratings was "Moody's Approach
to Corporate Collateralized Synthetic Obligations" published in September
Moody's analysis for this transaction is based on CDOROM v2.8.
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.
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 does not run a separate loss and cash flow analysis other than
the one already done by the CDOROM model. For a description of
the analysis, refer to the methodology and the CDOROM user's
guide on Moody's website.
Moody's analysis of CSOs is subject to uncertainties, the primary
sources of which include 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 CSO liabilities, rating transitions in the reference pool may
have leveraged rating implications for the ratings of the 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 in the corporate
universe. Should macroeconomics conditions evolve, the CSO
ratings will change to reflect the new economic developments.
Information sources used to prepare the credit rating are the following:
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.
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades its ratings on Magnolia Finance II Series 2006-7, a CSO
250 Greenwich Street
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