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2.            You acknowledge and agree that Moody’s credit ratings: (i) are current opinions of the future relative creditworthiness of securities and address no other risk; and (ii) are not statements of current or historical fact or recommendations to purchase, hold or sell particular securities.  Moody’s credit ratings and publications are not intended for retail investors, and it would be reckless and inappropriate for retail investors to use Moody’s credit ratings and publications when making an investment decision.  No warranty, express or implied, as the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any Moody’s credit rating is given or made by Moody’s in any form whatsoever.          

 

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Rating Action:

Moody's upgrades the rating of CBO notes issued by Arlington Street CDO (Cayman) Ltd.

28 Mar 2011

USD $44 million of debt securities affected

New York, March 28, 2011 -- Moody's Investors Service announced today that it has upgraded the rating of the following notes issued by Arlington Street CDO (Cayman) Ltd.:

U.S. $44,000,000 Class A-3 Fixed Rate Senior Secured Notes Due 2012, Upgraded to Baa3 (sf); previously on September 21, 2010 Upgraded to Ba3 (sf).

RATINGS RATIONALE

According to Moody's, the rating actions taken on the notes result primarily from the delevering of the Class A-1 and Class A-2 Notes, which have been paid down by approximately 79% or $36 million since the rating action in September 2010. As a result of the delevering, the overcollateralization ratios have increased since the rating action in September 2010. As of the latest trustee report dated March 10, 2011, the Class A overcollateralization ratio is reported at 164.06% versus 134.35% in August 2010.

Due to the impact of revised and updated key assumptions referenced in "Moody's Approach to Rating Collateralized Loan Obligations" and "Annual Sector Review (2009): Global CLOs," key model inputs used by Moody's in its analysis, such as par, weighted average rating factor, diversity score, and weighted average recovery rate, 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 $81.3 million, defaulted par of $33.7 million, a weighted average default probability of 23.6% (implying a WARF of 5844), a weighted average recovery rate upon default of 20.36%, and a diversity score of 16. These 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.

Arlington Street CDO (Cayman) Ltd., issued in June 2000, is a collateralized bond obligation backed primarily by a portfolio of senior unsecured bonds.

The principal methodology used in this rating was"Moody's Approach to Rating Collateralized Loan Obligations"published in August 2009. This publication incorporates rating criteria that apply to both collateralized loan obligations and collateralized bond obligations. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

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.

Moody's modeled the transaction using the Binomial Expansion Technique, as described in Section 2.3.2.1 of the "Moody's Approach to Rating Collateralized Loan Obligations" rating methodology published in August 2009. In addition, due to the low diversity of the collateral pool, CDOROM 2.6 was used to simulate a default distribution that was then applied as an input in the cash flow model.

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% (4675)

Class A-1: 0

Class A-2: 0

Class A-3: +2

Class B: 0

Class C: 0

Moody's Adjusted WARF + 20% (7013)

Class A-1: 0

Class A-2: 0

Class A-3: -2

Class B: 0

Class C: 0

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 speculative-grade debt maturing between 2012 and 2014 which may create challenges for issuers to refinance. CDO notes' performance may also be impacted by 1) the manager's investment strategy and behavior and 2) divergence in legal interpretation of CDO documentation by different transactional parties due to embedded ambiguities.

Sources of additional performance uncertainties are described below:

1. Delevering: The main source of uncertainty in this transaction is whether delevering from unscheduled principal proceeds will continue and at what pace. Delevering may accelerate due to high prepayment levels in the bond 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.

3. Long-dated assets: The presence of assets that mature beyond the CLO's legal maturity date exposes the deal to liquidation risk on those assets. Moody's notes that the primary exposure to long-dated assets consists of a sizeable balance outstanding on a credit linked note referencing corporate debt securities. The possible liquidation of the credit linked note at the deal's maturity will have a significant impact on the rating of the Class A-3 Notes in particular. Moody's analysis assumes terminal values upon liquidation at maturity to 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) and the asset's current market value. In the absence of current market prices, Moody's performs various sensitivity analyses assuming a range of liquidation values.

4. Lack of portfolio granularity: The performance of the portfolio depends to a large extent on the credit conditions of a few large obligors that are rated, especially when they experience jump to default. Due to the deal's low diversity score and lack of granularity, Moody's supplemented its typical Binomial Expansion Technique analysis with a simulated default distribution using Moody's CDOROM(TM) software and/or individual scenario analysis.

Further information on Moody's analysis of this transaction is available on www.moodys.com. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our web site, at www.moodys.com/SFQuickCheck.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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.

New York
Connie Li
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Ramon O. Torres
Senior Vice President
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's upgrades the rating of CBO notes issued by Arlington Street CDO (Cayman) Ltd.
No Related Data.
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