Moody's also affirms the ratings on $110.9 million of notes
New York, January 23, 2015 -- Moody's Investors Service has upgraded the rating on the following notes
issued by Katonah IX CLO Ltd.:
U.S.$26,000,000 Class A-3L Floating
Rate Notes Due 2019, Upgraded to Aa1 (sf); previously on July
25, 2014 Upgraded to Aa3 (sf)
U.S.$15,000,000 Class B-1L Floating
Rate Notes Due 2019, Upgraded to Baa3 (sf); previously on July
25, 2014 Affirmed Ba1 (sf)
Moody's affirmed the ratings on the following notes:
Up To U.S.$100,000,000 Class A-1LV
Revolving Floating Rate Notes Due 2019 (current outstanding balance of
$22,723,445.87), Affirmed Aaa (sf);
previously on July 25, 2014 Affirmed Aaa (sf)
U.S.$221,000,000 Class A-1L Floating
Rate Notes Due 2019 (current outstanding balance of $50,218,815.36),
Affirmed Aaa (sf); previously on July 25, 2014 Affirmed Aaa
(sf)
U.S.$23,000,000 Class A-2L Floating
Rate Notes Due 2019, Affirmed Aaa (sf); previously on July
25, 2014 Affirmed Aaa (sf)
U.S.$15,000,000 Class B-2L Floating
Rate Notes Due 2019, Affirmed Caa2 (sf); previously on July
25, 2014 Downgraded to Caa2 (sf)
Katonah IX CLO, Ltd., issued in November 2006,
is a collateralized loan obligation (CLO) backed primarily by a portfolio
of senior secured loans, with material exposure to CLO securities.
The transaction's reinvestment period ended in January 2013.
RATINGS RATIONALE
These rating actions are primarily a result of deleveraging of the senior
notes and an increase in the transaction's over-collateralization
ratios since July 2014. The Class A-1 notes have been paid
down by approximately 34.7% or $38.8 million.
Based on the trustee's December 2014 report, the over-collateralization
(OC) ratios for the Senior Class A, Class A-3L, Class
B-1L and Class B-2L notes are reported at 165.37%,
130.11%, 115.86%, and 104.42%,
respectively, versus July 2014 levels of 147.83%,
123.92%, 113.34%, and 104.42%,
respectively.
The portfolio includes a number of investments in securities that mature
after the notes do. Based on the trustee's December 2014 report,
securities that mature after the notes do currently amount to approximately
$20.0 million of the portfolio, the majority of which
are CLO securities. These investments could expose the notes to
market risk in the event of liquidation when the notes mature.
Methodology Used for the Rating Action
The principal methodology used in this rating was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in February
2014. 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.
7) Exposure to structured finance assets: The deal has a significant
amount of investments in CLO securities. The performance and characteristic
of these securities can be notably different from corporate debt,
and may introduce additional risk. Currently, 18.1%
of the deal's portfolio is composed of CLO securities.
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% (1931)
Class A-1LV: 0
Class A-1L: 0
Class A-2L: 0
Class A-3L: +1
Class B-1L: +2
Class B-2L: 0
Moody's Adjusted WARF + 20% (2897)
Class A-1LV: 0
Class A-1L: 0
Class A-2L: 0
Class A-3L: -2
Class B-1L: -1
Class B-2L: -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 Section 2.3 of the "Moody's
Global Approach to Rating Collateralized Loan Obligations," published
in February 2014.
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 $152.6 million, defaulted par
of $13.2 million, a weighted average default probability
of 13.54% (implying a WARF of 2414), a weighted average
recovery rate upon default of 49.47%, a diversity
score of 25 and a weighted average spread of 2.91% (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 did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
David Ham
VP - Senior Credit Officer
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
Min Xu
VP - Sr Credit Officer/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 ratings on $41.0 million of notes issued by Katonah IX CLO Ltd.
