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I AGREE
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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