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Rating Action:

Moody's upgrades the ratings of $41.6 million of TruPS CDO notes issued by Preferred Term IV Securities, Ltd.

Global Credit Research - 11 Oct 2013

New York, October 11, 2013 -- Moody's upgrades the ratings of $41.6 million of TruPS CDO notes issued by Preferred Term IV Securities, Ltd.

Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Preferred Term IV Securities, Ltd.

U.S. $341,000,000 Floating Rate Mezzanine Notes Due December 23, 2031 (current balance of $41,600,000), Upgraded to B1 (sf); previously on August 5, 2013 Caa2 (sf) Placed on Review for Possible Upgrade

RATIONALE

According to Moody's, the rating actions taken on the Mezzanine Notes is a result of a decrease in the dollar amount of assets that Moody's treats as defaulted in its analysis. Moody's dollar amount of defaulted assets decreased to $12M from $18M, resulting in an improvement of the Mezzanine Principal Coverage Test. The coverage test improved to 139.58%, as reported by the trustee in September 2013 from 124.67%, as reported by the trustee in September 2012.

Moody's notes that the transaction is highly concentrated and its portfolio performance depends to a large extent on the credit conditions of five performing obligors. The deal's lack of granularity could introduce high volatility to the performance of the deal.

Moody's notes that the key model inputs used by Moody's in its analysis, such as par, weighted average rating factor, and weighted average recovery rate, are based on its published methodology and 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 of $54.5M (and an Accreted Value of the FHLMC Principal Strip of $3.6M), defaulted $12M, a weighted average default probability of 18.97% (implying a WARF of 1013), Moody's Asset Correlation of 44.47% and a weighted average recovery rate upon default of 10%. In addition to the quantitative factors that are explicitly modeled, qualitative factors are part of rating committee considerations. Moody's considers the structural protections in the transaction, the risk of triggering 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, may influence the final rating decision.

Preferred Term Securities IV, Ltd, issued on December 18, 2001, is a collateralized debt obligation backed by a portfolio of bank trust preferred securities (the 'TruPS CDO').

The portfolio of this CDO is mainly comprised of trust preferred securities (TruPS) issued by small to medium sized U.S. community banks that are generally not publicly rated by Moody's. To evaluate the credit quality of bank TruPS without public ratings, Moody's uses RiskCalc model, an econometric model developed by Moody's KMV, to derive their credit scores. Moody's evaluation of the credit risk for a majority of bank obligors in the pool relies on FDIC financial data reported as of Q2-2013.

The methodologies used in this rating were "Moody's Approach to Rating TRUP CDOs" published in May 2011, and "Updated Approach to the Usage of Credit Estimates in Rated Transactions" published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's also evaluates the sensitivity of the rated transaction to the volatility of the credit estimates, as described in Moody's Cross Sector Rating Methodology "Updated Approach to the Usage of Credit Estimates in Rated Transactions" published in October 2009.

The transaction's portfolio was modeled using CDOROM v.2.8 to develop the default distribution from which the Moody's Asset Correlation parameter was obtained. This parameter was then used as an input in a cash flow model using CDOEdge. CDOROM v.2.8 is available on moodys.com under Products and Solutions -- Analytical models, upon return of a signed free license agreement.

Moody's performed a number of sensitivity analyses of the results to certain key factors driving the ratings. We analyzed the sensitivity of the model results to changes in the portfolio WARF (representing an improvement or a deterioration in the credit quality of the collateral pool), assuming that all other factors are held equal. If the WARF is increased to 1500 points from the base case of 1013 the model-implied rating of the Mezzanine notes is one notch worse than the base case result. Similarly, if the WARF is decreased to 1000 points, the model-implied rating of the Mezzanine notes is one notch better than the base case result.

In addition, Moody's also performed two additional sensitivity analyses as described in the Special Comment "Sensitivity Analyses on Deferral Cures and Default Timing for Monitoring TruPS CDOs" published in August 2012. We ran alternative default-timing profile scenarios to reflect the lower likelihood of a large spike in defaults. Below is a summary of the impact 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:

Sensitivity Analysis:

Mezzanine Notes: +1

Moody's notes that this transaction is still subject to a high level of macroeconomic uncertainty although our outlook on the banking sector has changed to stable from negative. The pace of FDIC bank failures continues to decline in 2013 compared to the last few years, and some of the previously deferring banks have resumed interest payment on their trust preferred securities.

Further information on Moody's analysis of this transaction is available on www.moodys.com.

REGULATORY DISCLOSURES

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.

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.

Yasmine Mahdavi
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 $41.6 million of TruPS CDO notes issued by Preferred Term IV Securities, Ltd.
No Related Data.

 

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