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Rating Action:

Moody's upgrades the rating of CBO notes issued by Stony Hill CDO III (previously Strong CDO III)

07 Apr 2011

USD $49 million of debt securities affected

New York, April 07, 2011 -- Moody's Investors Service announced today that it has upgraded the rating of the following notes issued by Stony Hill CDO III (previously Strong CDO III):

U.S.$219,300,000 Senior Secured Class A Floating Rate Notes Due 2013 (current outstanding balance of $49,420,497), Upgraded to Aaa (sf); previously on August 24, 2010 Upgraded to Aa2 (sf).

RATINGS RATIONALE

According to Moody's, the rating action taken on the notes results primarily from the delevering of the Class A Notes, which have been paid down by approximately 13% or $7.6 million since the last rating action in August 2010. As a result of the delevering, the Class A overcollateralization ratio has increased since the last rating action. As of the March 2011 trustee report, the Class A overcollateralization ratio is reported at 129.82% versus the July 2010 level of 124.86%. Moody's also notes that the deal has benefited from improvement in the credit quality of the underlying portfolio since the rating action in August 2010. Based on the March 2011 trustee report, the weighted average rating factor is 1146 compared to 1886 in July 2010, and securities rated Caa1 and below make up approximately 7.8% of the underlying portfolio versus 12.7% in July 2010, excluding defaulted securities.

Additionally, Moody's also assessed the collateral pool's elevated concentration risk in debt obligations of companies in the banking, finance, real estate, and insurance industries, which Moody's views to be more strongly correlated in the current market environment.

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 of $50.4 million, principal proceeds of $12.2 million, defaulted par of $5 million, weighted average default probability of 2.0% (implying a WARF of 1215), a weighted average recovery rate upon default of 27%, and a diversity score of 12. 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.

Stony Hill CDO III (previously Strong CDO III), issued on September 13, 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.

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. In addition, due to the low diversity of the collateral pool, CDOROM 2.8 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, whereby a positive difference corresponds to lower expected losses), assuming that all other factors are held equal:

Moody's Adjusted WARF - 20% (972)

Class A: 0

Class B: 0

Moody's Adjusted WARF + 20% (1458)

Class A: 0

Class B: 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) 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 non investment grade, 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 software and/or individual scenario analysis.

3) Exposure to financial credits: The deal is exposed to a large number of securities in the banking, finance, real estate, and insurance industries, which Moody's views to be more strongly correlated in the current market environment. As of the trustee report, dated March 2011, securities in the banking, finance, real estate, and insurance industries make up approximately 45% of the portfolio.

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
Shan Lai
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 Stony Hill CDO III (previously Strong CDO III)
No Related Data.
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CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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