Moody's also affirms the ratings of $256.8 million of notes
New York, September 11, 2013 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Waterfront CLO 2007-1, Ltd.:
U.S.$19,000,000 Class B Floating Rate
Notes Due August 2, 2020, Upgraded to A3 (sf); previously
on July 21, 2011 Upgraded to Baa1 (sf)
Moody's also affirmed the ratings of the following notes:
U.S.$195,000,000 Class A-1 Floating
Rate Notes Due August 2, 2020 (current outstanding balance of $193,286,410),
Affirmed Aaa (sf); previously on August 30, 2007 Assigned Aaa
(sf)
U.S.$32,000,000 Class A-2 Floating
Rate Notes Due August 2, 2020, Affirmed Aa1 (sf); previously
on July 21, 2011 Upgraded to Aa1 (sf)
U.S.$9,500,000 Class A-3 Floating
Rate Notes Due August 2, 2020, Affirmed Aa3 (sf); previously
on July 21, 2011 Upgraded to Aa3 (sf)
U.S.$11,500,000 Class C Floating Rate
Notes Due August 2, 2020, Affirmed Ba1 (sf); previously
on July 21, 2011 Upgraded to Ba1 (sf)
U.S.$10,500,000 Class D Floating Rate
Notes Due August 2, 2020, Affirmed Ba3 (sf); previously
on July 21, 2011 Upgraded to Ba3 (sf)
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes reflect
the benefit of the short period of time remaining before the end of the
deal's reinvestment period in October 2013. In consideration of
the reinvestment restrictions applicable during the amortization period,
and therefore limited ability to effect significant changes to the current
collateral pool, Moody's analyzed the deal assuming a higher likelihood
that the collateral pool characteristics will continue to maintain a positive
buffer relative to certain covenant requirements. In particular,
the deal is assumed to benefit from having a higher weighted average spread
("WAS") than the covenant level. Moody's modeled a WAS of 4.57%
compared to the covenant level of 2.90%.
Notwithstanding the benefit of a higher modeled WAS, Moody's
notes that the weighted average recovery rate ("WARR") of
the portfolio has decreased since the last rating action. Moody's
modeled a WARR of 44.7% compared to 46.3%
at the time of the last rating action. Additionally, the
credit quality of the underlying portfolio has deteriorated. Based
on the August 2013 trustee report, the weighted average rating factor
is currently 2546 compared to 2446 in August 2012.
Moody's notes that the key model inputs used by Moody's in its analysis,
such as par, weighted average rating factor, diversity score,
and weighted average recovery rate, are based on its published methodology
and 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 and principal proceeds balance of $290
million, defaulted par of $3.8 million, a weighted
average default probability of 19.91% (implying a WARF of
2654), a weighted average recovery rate upon default of 44.66%,
and a diversity score of 55. The 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.
Waterfront CLO 2007-1, Ltd., issued in August
2007, is a collateralized loan obligation backed primarily by a
portfolio of senior secured loans.
The principal methodology used in this rating was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in May 2013.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
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"
rating methodology published in May 2013.
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% (2123)
Class A-1: 0
Class A-2: +1
Class A-3: +2
Class B: +3
Class C: +2
Class D: +1
Moody's Adjusted WARF + 20% (3185)
Class A-1: 0
Class A-2: -2
Class A-3: -2
Class B: -2
Class C: -1
Class D: -1
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 upcoming
speculative-grade debt maturities which may create challenges for
issuers to refinance. CLO notes' performance may also be
impacted by 1) the manager's investment strategy and behavior and
2) divergence in legal interpretation of CLO documentation by different
transactional parties due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Deleveraging: The main source of uncertainty in this transaction
is whether deleveraging from unscheduled principal proceeds will commence
and at what pace. Deleveraging may accelerate due to high prepayment
levels in the loan 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.
Further information on Moody's analysis of this transaction is available
on www.moodys.com.
REGULATORY DISCLOSURES
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.
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.
Craig Sabatini
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
David Ham
VP - Senior Credit Officer
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 the rating of $19.0 million of notes issued by Waterfront CLO 2007-1, Ltd.
