New York, July 17, 2014 -- Moody's Investors Service has upgraded the ratings on the following notes
issued by Alesco Preferred Funding I, Ltd.:
U.S.$149,000,000 Class A-1 First
Priority Senior Secured Floating Rate Notes Due October 15, 2033
(current balance of $37,466,535.81), Upgraded
to Aaa (sf); previously on June 26, 2014 Aa1 (sf) Placed Under
Review for Possible Upgrade
U.S.$66,000,000 Class A-2 Second
Priority Senior Secured Floating Rate Notes Due October 15, 2033,
Upgraded to Aa1 (sf); previously on June 26, 2014 Aa3 (sf)
Placed Under Review for Possible Upgrade
U.S.$56,700,000 Class B-1 Mezzanine
Secured Floating Rate Notes Due October 15, 2033 (current balance
of $59,877,996.60, including deferring
interest), Upgraded to Caa1 (sf); previously on June 26,
2014 Caa2 (sf) Placed Under Review for Possible Upgrade
U.S.$45,000,000 Class B-2 Mezzanine
Secured Fixed/Floating Rate Notes Due October 15, 2033 (current
balance of $47,522,219.51), Upgraded to
Caa1 (sf); previously on June 26, 2014 Caa2 (sf) Placed Under
Review for Possible Upgrade
Alesco Preferred Funding I, Ltd., issued on September
25, 2003, is a collateralized debt obligation backed by a
portfolio of bank trust preferred securities.
RATINGS RATIONALE
The rating actions are primarily a result of updates to Moody's
TruPS CDOs methodology, as described in "Moody's Approach
to Rating TruPS CDOs" published in June 2014. They also reflect
deleveraging of the Class A-1 notes, an increase in the transaction's
over-collateralization ratios and slight improvement in the credit
quality of the underlying portfolio since July 2013.
The transaction has benefited from the updates to Moody's TruPS
CDOs methodology, including (1) removing the current 25%
macro default probability stress for bank and insurance TruPS; (2)
expanding the default timing profiles from one to six probability-weighted
scenarios; (3) incorporating a redemption profile for bank and insurance
TruPS; and (4) using a loss distribution generated by Moody's CDOROM™
for deals that do not permit reinvestment.
In addition, the Class A-1 notes have paid down by approximately
21% each or $9.6 million since July 2013, using
principal proceeds from the redemption of the underlying assets and the
diversion of excess interest proceeds. The Class A-1 notes'
par coverage has thus improved to 501.3% from 409.15%
since July 2013, by Moody's calculations. Based on
the trustee's May 2014 report, the Class A overcollateralization
test was 181.82% (limit 125.00%), versus
168.92% in July 2013, and that of the Class B overcollateralization
test, 89.22% (limit 101.3%), versus
87.68% in July 2013. The Class A-1 notes will
continue to benefit from the diversion of excess interest and the use
of proceeds from redemptions of any assets in the collateral pool.
Moody's also observed that the credit quality of the underlying
portfolio has slightly improved since July 2013. Based on Moody's
calculations, the weighted average rating factor with credit estimate
stresses (WARF) decreased to 541, from 643 in July 2013.
In taking the foregoing actions, Moody's also announced that it
had concluded its review of its rating(s) on the issuer's Class A-1,
Class A-2, Class B-1 and Class B-2 Notes announced
on June 26, 2014. At that time, Moody's had placed
their ratings on review for upgrade as a result of the aforementioned
methodology updates.
The key model inputs Moody's used in its analysis, such as
par, weighted average rating factor, and weighted average
recovery rate, are based on its methodology and could differ from
the trustee's reported numbers. In its base case, Moody's
analyzed the underlying collateral pool has having a performing par and
of $187.8 million, defaulted/deferring par of $15
million, a weighted average default probability of 6.03%
(implying a WARF of 541), and a weighted average recovery rate upon
default of 10%. In addition to the quantitative factors
Moody's explicitly models, qualitative factors are part of
rating committee considerations. Moody's considers the structural
protections in the transaction, the risk of an event of default,
recent deal performance under current market conditions, the legal
environment and specific documentation features. All information
available to rating committees, including macroeconomic forecasts,
inputs from other Moody's analytical groups, market factors,
and judgments regarding the nature and severity of credit stress on the
transactions, can influence the final rating decision.
Methodology Underlying the Rating Action
The principal methodology used in this rating was "Moody's Approach to
Rating TruPS CDOs," published in June 2014. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
Factors that Would Lead to an Upgrade or Downgrade of the Rating:
This transaction is subject to a number of factors and circumstances that
could lead to either an upgrade or downgrade of the ratings, as
described below:
1) Macroeconomic uncertainty: TruPS CDOs performance could be negatively
affected by uncertainty about credit conditions in the general economy.
For bank TruPS CDOs Moody's has a stable outlook on the US banking
sector.
2) Portfolio credit risk: Credit performance of the assets collateralizing
the transaction that is better than Moody's current expectations
could have a positive impact on the transaction's performance.
Conversely, asset credit performance weaker than Moody's current
expectations could have adverse consequences on the transaction's
performance.
3) Deleveraging: One source of uncertainty in this transaction is
whether deleveraging from unscheduled principal proceeds and excess interest
proceeds will continue and at what pace. Note repayments that are
faster than Moody's current expectations could have a positive impact
on the notes' ratings, beginning with the notes with the highest
payment priority.
4) Resumption of interest payments by deferring assets: A number
of banks have resumed making interest payments on their TruPS.
The timing and amount of deferral cures could have significant positive
impact on the transaction's over-collateralization ratios and the
ratings on the notes.
5) Exposure to non-publicly rated assets: The deal contains
a large number of securities whose default probability Moody's assesses
through credit scores derived using RiskCalc™ or credit estimates.
Because these are not public ratings, they are subject to additional
uncertainties.
Loss and Cash Flow Analysis:
Moody's applied a Monte Carlo simulation framework in Moody's
CDOROM™ v.2.13.1 to model the loss distribution
for TruPS CDOs. The simulated defaults and recoveries for each
of the Monte Carlo scenarios defined the reference pool's loss distribution.
Moody's then used the loss distribution as an input in its CDOEdge™
cash flow model. CDOROM™ v. 2.13.1 is
available on www.moodys.com under Products and Solutions
-- Analytical models, upon receipt of a signed free
license agreement.
The portfolio of this CDO contains mainly TruPS issued by small to medium
sized U.S. community banks that Moody's does not rate
publicly. To evaluate the credit quality of bank TruPS that do
not have public ratings, Moody's uses RiskCalc™, an
econometric model developed by Moody's Analytics, to derive credit
scores. Moody's evaluation of the credit risk of most of the bank
obligors in the pool relies on FDIC Q1-2014 financial data.
In addition to the base case analysis, Moody's also conducted sensitivity
analyses to test the impact of a number of default probabilities on the
rated notes relative to the base case modeling results, which may
be different from the current public ratings of the notes. Below
is a summary of the impact of different default probabilities (expressed
in terms of WARF) on all of the rated notes (by the difference in the
number of notches versus the current model output, for which a positive
difference corresponds to lower expected loss):
Assuming a two-notch upgrade to assets with below-investment
grade ratings or rating estimates (WARF of 352)
Class A-1: 0
Class A-2: 0
Class B-1: 0
Class B-2: 0
Assuming a two-notch downgrade to assets with below-investment
grade ratings or rating estimates (WARF of 810)
Class A-1: 0
Class A-2: -1
Class B-1: -1
Class B-2: -1
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions of the disclosure form.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of this transaction
in the past six months.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
As the section on loss and cash flow analysis describes, Moody's
quantitative analysis entails an evaluation of scenarios that stress factors
contributing to sensitivity of ratings and take into account the likelihood
of severe collateral losses or impaired cash flows. Moody's
weights the impact on the rated instruments based on its assumptions of
the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Rachid Ouzidane
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Rodrigo Araya
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades the ratings of $210.8 million of TruPS CDO notes issued by Alesco Preferred Funding I, Ltd.
