USD $12.7 million of debt securities affected
New York, December 21, 2010 -- Moody's Investors Service announced today that it has upgraded the rating
of the following notes issued by Nautique Funding Ltd.:
U.S. $12,700,000 Class D Floating Rate
Deferrable Senior Subordinate Notes due 2020, Upgraded to Caa3 (sf);
previously on November 23, 2010 Ca (sf) Placed Under Review for
Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating action taken on the notes result
primarily from an increase in the overcollateralization of the notes since
the rating action in June 2009. Based on the latest trustee report
dated November 9, 2010, the Class A, Class B,
Class C, and Class D Overcollateralization Tests are reported at
121.6%, 113.7%, 106.5%,
and 103.8%, respectively versus August 2009 levels
of 113.1%, 105.8%, 99.1%,
and 96.6%, and are currently all in compliance.
In addition, the Class D Notes are no longer deferring interest
and all previously deferred interest has been paid in full.
Moody's also notes that the credit quality of the portfolio is stable
versus the last rating action. Furthermore, the dollar amount
of defaulted securities reported by the trustee in November 2010 has decreased
to about $11.8 million from approximately $49.7
million in August 2009. Furthermore, Moody's observes that
the transaction has exposure to a number of mezzanine and junior CLO tranches
in the underlying portfolio that are currently under review for possible
upgrade.
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 of $530
million, defaulted par of $12 million, weighted average
default probability of 30.97% (implying a WARF of 3956),
a weighted average recovery rate upon default of 42.18%,
and a diversity score of 65. 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.
Nautique Funding Ltd., issued in April 2006, is a collateralized
loan obligation backed primarily by a portfolio of senior secured loans.
The principal methodology used in this rating is "Moody's Approach to
Rating Collateralized Loan Obligations" published in August 2009.
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 to the base case analysis described above, Moody's also
performed a number of sensitivity analyses to test the impact on all rated
notes, including the following:
1. Various default probabilities to capture potential defaults
in the underlying portfolio.
2. A range of recovery rate assumptions for all assets to capture
variability in recovery rates.
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% (3165)
Class A-1: +2
Class A-2a: +1
Class A-2b: +2
Class A-3: +2
Class B-1: +2
Class B-2: +2
Class C: +3
Class D: +1
Moody's Adjusted WARF + 20% (4747)
Class A-1: -2
Class A-2a: -2
Class A-2b: -1
Class A-3: -2
Class B-1: -2
Class B-2: -2
Class C: -2
Class D: 0
Below is a summary of the impact of different recovery rate 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 WARR + 2% (44.18%)
Class A-1: +1
Class A-2a: 0
Class A-2b: +1
Class A-3: +1
Class B-1: 0
Class B-2: 0
Class C: +1
Class D: 0
Moody's Adjusted WARR - 2% (40.18%)
Class A-1: 0
Class A-2a: -1
Class A-2b: 0
Class A-3: -1
Class B-1: -1
Class B-2: 0
Class C: -1
Class D: 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 managers' investment strategies and behaviour 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) 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 selling 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.
2) 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 assumes an asset's terminal
value upon liquidation at maturity to be equal to the lower of an assumed
liquidation value and the asset's current market value.
3) Weighted average life: The notes' ratings are sensitive
to the weighted average life assumption of the portfolio, which
may be extended due to the manager's decision to reinvest into new
issue loans or other loans with longer maturities and/or participate in
amend-to-extend offerings. Moody's tested for
a possible extension of the actual weighted average life in its analysis.
4) Other collateral quality metrics: The deal is allowed to reinvest
and the manager has the ability to deteriorate the collateral quality
metrics' existing cushions against the covenant levels. Moody's
analyzed the impact of assuming lower of reported and covenanted values
for weighted average rating factor, weighted average spread,
weighted average coupon, and diversity score. However,
in light of the large positive difference between the reported and covenant
levels for weighted average spread, Moody's base case analysis incorporates
the impact of assuming the midpoint of the reported and covenanted weighted
average spread.
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
Min Xu
Vice President - Senior 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 CLO notes issued by Nautique Funding Ltd.
