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.
