Moody's also confirms the ratings of $19.5MM of notes
New York, March 11, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Sagamore CLO, Ltd.:
U.S. $70,000,000 Class A-1 Delayed
Drawdown Note Rights Due 2015 (current outstanding balance of $35,949,589),
Upgraded to Aa2 (sf); previously on May 7, 2010 Upgraded to
A2 (sf);
U.S. $161,000,000 Class A-2 Note
Rights Due 2015 (current outstanding balance of $82,684,054),
Upgraded to Aa2 (sf); previously on May 7, 2010 Upgraded to
A2 (sf);
U.S. $5,000,000 Class A-3 Zero
Coupon Accreting Note Rights Due 2015 (current outstanding balance of
$2,567,828), Upgraded to Aa2 (sf); previously
on May 7, 2010 Upgraded to A2 (sf);
U.S. $18,000,000 Class B Deferrable Note
Rights Due 2015, Upgraded to Baa3 (sf); previously on May 7,
2010 Upgraded to Ba3 (sf);
U.S. $5,000,000 Class 1 Participation
Notes Due 2015 (current rated balance of $2,567,828),
Upgraded to Aa2 (sf); previously on May 7, 2010 Upgraded to
A2 (sf);
U.S. $5,000,000 Class 2 Participation
Notes Due 2015 (current rated balance of $2,635,548),
Upgraded to Baa2 (sf); previously on May 7, 2010 Upgraded to
Ba3 (sf).
Moody's also confirmed the ratings of the following notes:
U.S. $16,000,000 Class C-1 Floating
Rate Deferrable Note Rights Due 2015, Confirmed at Caa3 (sf);
previously on November 23, 2010 Caa3 (sf) Placed Under Review for
Possible Upgrade;
U.S. $500,000 Class C-2 Fixed Rate Deferrable
Note Rights Due 2015, Confirmed at Caa3 (sf); previously on
November 23, 2010 Caa3 (sf) Placed Under Review for Possible Upgrade;
U.S. $3,000,000 Class D Junior Mezzanine
Deferrable Note Rights Due 2015, Confirmed at C (sf); previously
on November 23, 2010 C (sf) Placed Under Review for Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the upgrade actions today result primarily
from an increase in the overcollateralization of the notes since the rating
action in May 2010. The notes benefited from the delevering of
the Class A-1, A-2 and A-3 Notes, which
have been paid down by approximately $68 million or 36%
since May 2010. Based on the latest trustee report dated February
7, 2011, The Class A, Class B, and Class C overcollateralization
ratios increased to 138.14%, 120.19%,
and 107.40%, respectively, from 121.98%,
112.39%, and 104.84% in April 2010.
Additionally, the deal experienced a decrease in defaulted securities,
which currently total about $5.2 million, compared
to $13.4 million of defaulted collateral reported in April
2010.
Despite significant delevering of the transaction, Moody's noted
that the credit quality of the underlying portfolio has deteriorated since
the rating action in May 2010, which is observed through an increase
in the average credit rating (as measured by the weighted average rating
factor) and an increase in the proportion of securities from issuers rated
Caa1 and below. In particular, the weighted average rating
factor is currently 3038 compared to 2791 in April 2010, and securities
rated Caa1/CCC+ or lower make up approximately 18.1%
of the underlying portfolio versus 12% in April 2010.
Moody's confirmed the ratings of the Class C-1, Class
C-2, and Class D Notes, due to the deal's significant
exposure to investments in securities that mature after the maturity date
of the notes. Many of such investments are in CLO tranches with
low speculative-grade ratings, which Moody's assumes
in its analysis to be liquidated at very low values at the time of the
notes' maturity.
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 $169.6 million, defaulted par of $6 million,
a weighted average default probability of 24.43% (implying
a WARF of 3875), a weighted average recovery rate upon default of
43.53%, and a diversity score of 49. 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.
Sagamore CLO, Ltd., issued in October 2003, is
a collateralized loan obligation backed primarily by a portfolio of senior
secured loans.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009
and "Using the Structured Note Methodology to Rate CDO Combo-Notes"
published in February 2004.
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 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% (3100)
Class A-1: +2
Class A-2: +2
Class A-3: +2
Class B: +1
Class C-1: 0
Class C-2: 0
Class D: 0
Class 1: +2
Class 2: +2
Moody's Adjusted WARF + 20% (4650)
Class A-1: -1
Class A-2: -1
Class A-3: -1
Class B: -1
Class C-1: -1
Class C-2: -1
Class D: 0
Class 1: -1
Class 2: -1
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 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) 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 loan 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 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.
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 ratings of $144.5MM of notes issued by Sagamore CLO, Ltd.
