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Rating Action:

Moody's upgrades the rating of $273 million of TruPS CDO notes issued by Alesco Preferred Funding IX, Ltd.

Global Credit Research - 18 Jul 2014

New York, July 18, 2014 -- Moody's Investors Service has upgraded the rating on the following notes issued by Alesco Preferred Funding IX, Ltd.:

U.S. $365,000,000 Class A-1 First Priority Delayed Draw Senior Secured Floating Rate Notes Due June 23, 2036 (current balance of $272,877,867 ), Upgraded to A2 (sf); previously on June 26, 2014 A3 (sf) Placed Under Review for Possible Upgrade

Alesco Preferred Funding IX, Ltd., issued in December 2005, is a collateralized debt obligation backed by a portfolio of bank and insurance trust preferred securities (TruPS).

RATINGS RATIONALE

The rating action is primarily a result of updates to Moody's TruPS CDOs methodology, as described in "Moody's Approach to Rating TruPS CDOs" published in June 2014. It also reflect deleveraging of the Class A-1 notes, an increase in the transaction's over-collateralization ratios, resumption of interest payments of previously deferring assets and the improvement in the credit quality of the underlying portfolio since the last rating action in December 2013.

The transaction has benefited from the updates to Moody's TruPS CDOs methodology, including (1) removing the current 25% macro default probability stress for bank and insurance TruPS; (2) expanding the default timing profiles from one to six probability-weighted scenarios; (3) incorporating a redemption profile for bank and insurance TruPS; (4) using a loss distribution generated by Moody's CDOROM™ for deals that do not permit reinvestment; (5) giving full par credit to deferring bank TruPS that meet certain criteria; and (6) raising the assumed recovery rate for insurance TruPS.

In addition, the Class A-1 notes have paid down by approximately 9.1% or $27.3 million since December 2013, using principal proceeds from the redemption of the underlying assets and the diversion of excess interest proceeds. The Class A-1 notes' par coverage has thus improved to 164.0% from 146.5% since December 2013, by Moody's calculations. Based on the trustee's June 2014 report, the over-collateralization ratio of the Class A notes was 129.9% (limit 146.2%), versus 124.2% in December 2013, and that of the Class D notes, 76.4% (limit 101.5%), versus 75.4% in December 2013. The Class A-1 notes will continue to benefit from the diversion of excess interest and the use of proceeds from redemptions of any assets in the collateral pool.

The deal has also benefited from improvement in the credit quality of the underlying portfolio. The total par amount that Moody's treated as having defaulted or deferring declined to $79 million from $107 million in December 2013. Since December 2013, two previously deferring banks with a total par of $9 million have resumed making interest payments on their TruPS; two assets with a total par of $20.3 million have redeemed at par.

In taking the foregoing actions, Moody's also announced that it had concluded its review of its rating on the issuer's Class A-1 Notes announced on June 26, 2014. At that time, Moody's had placed the rating on review for upgrade as a result of the aforementioned methodology updates.

The key model inputs Moody's used in its analysis, such as par, weighted average rating factor, and weighted average recovery rate, are based on its methodology and could differ from the trustee's reported numbers. In its base case, Moody's analyzed the underlying collateral pool has having a performing par of $447.6 million, defaulted/deferring par of $79 million, a weighted average default probability of 12.36% (implying a WARF of 1236), and a weighted average recovery rate upon default of 10%. In addition to the quantitative factors Moody's explicitly models, qualitative factors are part of rating committee considerations. Moody's considers the structural protections in the transaction, the risk of an event of default, recent deal performance under current market conditions, the legal environment and specific documentation features. All information available to rating committees, including macroeconomic forecasts, inputs from other Moody's analytical groups, market factors, and judgments regarding the nature and severity of credit stress on the transactions, can influence the final rating decision.

Methodology Underlying the Rating Action

The principal methodology used in this rating was "Moody's Approach to Rating TruPS CDOs," published in June 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, as described below:

1) Macroeconomic uncertainty: TruPS CDOs performance could be negatively affected by uncertainty about credit conditions in the general economy. Moody's has a stable outlook on the US banking sector. Moody's maintains its stable outlook on the US insurance sector.

2) Portfolio credit risk: Credit performance of the assets collateralizing the transaction that is better than Moody's current expectations could have a positive impact on the transaction's performance. Conversely, asset credit performance weaker than Moody's current expectations could have adverse consequences on the transaction's performance.

3) Deleveraging: One source of uncertainty in this transaction is whether deleveraging from unscheduled principal proceeds and excess interest proceeds will continue and at what pace. Note repayments that are faster than Moody's current expectations could have a positive impact on the notes' ratings, beginning with the notes with the highest payment priority.

4) Resumption of interest payments by deferring assets: A number of banks have resumed making interest payments on their TruPS. The timing and amount of deferral cures could have significant positive impact on the transaction's over-collateralization ratios and the ratings on the notes.

5) Exposure to non-publicly rated assets: The deal contains a large number of securities whose default probability Moody's assesses through credit scores derived using RiskCalc™ or credit estimates. Because these are not public ratings, they are subject to additional estimation uncertainty.

Loss and Cash Flow Analysis:

Moody's applied a Monte Carlo simulation framework in Moody's CDOROM™ v.2.13.1 to model the loss distribution for TruPS CDOs. The simulated defaults and recoveries for each of the Monte Carlo scenarios defined the reference pool's loss distribution. Moody's then used the loss distribution as an input in its CDOEdge™ cash flow model. CDOROM™ v. 2.13.1 is available on www.moodys.com under Products and Solutions -- Analytical models, upon receipt of a signed free license agreement.

The portfolio of this CDO contains mainly TruPS issued by small to medium sized U.S. community banks and insurance companies that Moody's does not rate publicly. To evaluate the credit quality of bank TruPS that do not have public ratings, Moody's uses RiskCalc™, an econometric model developed by Moody's Analytics, to derive credit scores. Moody's evaluation of the credit risk of most of the bank obligors in the pool relies on FDIC Q1-2014 financial data. For insurance TruPS that do not have public ratings, Moody's relies on the assessment of its Insurance team, based on the credit analysis of the underlying insurance firms' annual statutory financial reports.

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):

Assuming a two-notch upgrade to assets with below-investment grade ratings or rating estimates (WARF of 790)

Class A-1: +2

Class A-2A: +2

Class A-2B: +3

Class B-1: +3

Class B-2: +3

Class C-1: 0

Class C-2: 0

Class C-3: 0

Class C-4: 0

Assuming a two-notch downgrade to assets with below-investment grade ratings or rating estimates (WARF of 1904)

Class A-1: -1

Class A-2A: -1

Class A-2B: -1

Class B-1: -2

Class B-2: -2

Class C-1: 0

Class C-2: 0

Class C-3: 0

Class C-4: 0

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.

As the section on loss and cash flow analysis describes, 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.

Haoning Ding
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

Rodrigo Araya
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 the rating of $273 million of TruPS CDO notes issued by Alesco Preferred Funding IX, Ltd.
No Related Data.
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