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Related Issuers
Rating Action:

Moody's upgrades rating on $9 million of notes issued by Four Corners CLO III, Ltd

23 Dec 2015

Moody's also affirms the ratings on $76 million of notes

New York, December 23, 2015 -- Moody's Investors Service has upgraded the rating on the following notes issued by Four Corners CLO III, Ltd:

U.S.$ 9,000,000 Class D Deferrable Floating Rate Notes Due 2020, Upgraded to A1 (sf); previously on Jul 1, 2015 Upgraded to A3 (sf)

Moody's also affirmed the ratings on the following notes:

U.S.$230,400,000 Class A Floating Rate Notes Due 2020 (current outstanding balance of $39,493,006), Affirmed Aaa (sf); previously on Jul 1, 2015 Affirmed Aaa (sf)

U.S.$9,000,000 Class B Floating Rate Notes Due 2020, Affirmed Aaa (sf); previously on Jul 1, 2015 Affirmed Aaa (sf)

U.S.$18,000,000 Class C Deferrable Floating Rate Notes Due 2020, Affirmed Aaa (sf); previously on Jul 1, 2015 Upgraded to Aaa (sf)

U.S.$9,600,000 Class E Deferrable Floating Rate Notes Due 2020, Affirmed Ba3 (sf); previously on Jul 1, 2015 Affirmed Ba3 (sf)

Four Corners CLO III, Ltd., issued in September 2006, is a collateralized loan obligation (CLO) backed primarily by a portfolio of senior secured loans. The transaction's reinvestment period ended in October 2012.

RATINGS RATIONALE

These rating actions are primarily a result of deleveraging of the senior notes and an increase in the transaction's over-collateralization (OC) ratios since July 2015. Since then, the Class A notes have been paid down by approximately 27% or $14.7 million. Based on the December trustee's report, the OC ratios for the Class A/B, Class C, Class D and Class E notes are reported at 188.7%, 137.6%, 121.2% and 107.5%, respectively, versus July 2015 levels of 168.3%, 131.0%, 118.0% and 106.6%, respectively.

The portfolio includes a number of investments in securities that mature after the notes do. Based on Moody's calculation, securities that mature after the notes do currently make up approximately 16% of the portfolio. These investments could expose the notes to market risk in the event of liquidation when the notes mature. Despite the increase in the OC ratio of the Class E notes, Moody's affirmed the rating on the Class E notes owing to market risk stemming from the exposure to these long-dated assets.

Methodology Used for the Rating Action

The principal methodology used in these ratings was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in December 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Factors that Would Lead to an Upgrade or Downgrade of the Rating:

This transaction is subject to a number of factors and circumstances that could lead to either an upgrade or downgrade of the ratings:

1) Macroeconomic uncertainty: CLO performance is subject to a) uncertainty about credit conditions in the general economy and b) the large concentration of upcoming speculative-grade debt maturities, which could make refinancing difficult for issuers.

2) Collateral Manager: Performance can also be affected positively or negatively by a) the manager's investment strategy and behavior and b) differences in the legal interpretation of CLO documentation by different transactional parties owing to embedded ambiguities.

3) Collateral credit risk: A shift towards collateral of better credit quality, or better credit performance of assets collateralizing the transaction than Moody's current expectations, can lead to positive CLO performance. Conversely, a negative shift in credit quality or performance of the collateral can have adverse consequences for CLO performance.

4) Deleveraging: An important source of uncertainty in this transaction is whether deleveraging from unscheduled principal proceeds will continue and at what pace. Deleveraging of the CLO could accelerate owing to high prepayment levels in the loan market and/or collateral sales by the manager, which could have a significant impact on the notes' ratings. Note repayments that are faster than Moody's current expectations will usually have a positive impact on CLO notes, beginning with those with the highest payment priority.

5) Recovery of defaulted assets: Fluctuations in the market value of defaulted assets reported by the trustee and those that Moody's assumes as having defaulted could result in volatility in the deal's OC levels. Further, the timing of recoveries and whether a manager decides to work out or sell defaulted assets create additional uncertainty. 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. Realization of higher than assumed recoveries would positively impact the CLO.

6) Long-dated assets: The presence of assets that mature after the CLO's legal maturity date exposes the deal to liquidation risk on those assets. This risk is borne first by investors with the lowest priority in the capital structure. Moody's assumes that the terminal value of an asset upon liquidation at maturity will 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) or the asset's current market value. The deal's increased exposure owing to amendments to loan agreements extending maturities continues. In light of the deal's sizable exposure to long-dated assets, which increases its sensitivity to the liquidation assumptions in the rating analysis, Moody's ran scenarios using a range of liquidation value assumptions. However, actual long-dated asset exposures and prevailing market prices and conditions at the CLO's maturity will drive the deal's actual losses, if any, from long-dated assets.

In addition to the base case analysis, Moody's also conducted sensitivity analyses to test the impact of a number of default probabilities on the rated notes relative to the base case modeling results, which may be different from the current public ratings of the notes.Below is a summary of the impact of different default probabilities (expressed in terms of WARF) on all of the rated notes (by the difference in the number of notches versus the current model output, for which a positive difference corresponds to lower expected loss):

Moody's Adjusted WARF -- 20% (1784)

Class A: 0

Class B: 0

Class C: 0

Class D: +2

Class E: +2

Moody's Adjusted WARF + 20% (2676)

Class A: 0

Class B: 0

Class C: 0

Class D: -2

Class E: -1

Loss and Cash Flow Analysis:

Moody's modeled the transaction using a cash flow model based on the Binomial Expansion Technique, as described in "Moody's Global Approach to Rating Collateralized Loan Obligations.

The key model inputs Moody's used in its analysis, such as par, weighted average rating factor, diversity score and the weighted average recovery rate, are based on its published methodology and could differ from the trustee's reported numbers. In its base case, Moody's analyzed the collateral pool as having a performing par and principal proceeds balance of $91 million, defaulted par of $1.5 million, a weighted average default probability of 12.20% (implying a WARF of 2230), a weighted average recovery rate upon default of 49.37%, a diversity score of 28 and a weighted average spread of 2.79%(before accounting for LIBOR floors).

Moody's incorporates the default and recovery properties of the collateral pool in cash flow model analysis where they are subject to stresses as a function of the target rating on each CLO liability reviewed. Moody's derives the default probability from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The average recovery rate for future defaults is based primarily on the seniority of the assets in the collateral pool. Moody's generally applies recovery rates for CLO securities as published in "Moody's Approach to Rating SF CDOs". In some cases, alternative recovery assumptions may be considered based on the specifics of the analysis of the CLO transaction. In each case, historical and market performance and the collateral manager's latitude for trading the collateral are also factors.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's describes its loss and cash flow analysis in the section "Ratings Rationale" of this press release.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Aileen Wang
Associate Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Paul Buttress
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's upgrades rating on $9 million of notes issued by Four Corners CLO III, Ltd
No Related Data.
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