Moody's also affirms the ratings of $215.1 million of notes
New York, October 17, 2013 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Katonah IX CLO Ltd.:
U.S.$23,000,000 Class A-2L Floating
Rate Notes Due 2019, Upgraded to Aaa (sf); previously on March
21, 2013 Upgraded to Aa1 (sf)
U.S.$26,000,000 Class A-3L Floating
Rate Notes Due 2019, Upgraded to A1 (sf); previously on March
21, 2013 Upgraded to Baa2 (sf)
U.S.$15,000,000 Class B-1L Floating
Rate Notes Due 2019, Upgraded to Ba1 (sf); previously on March
21, 2013 Affirmed Ba2 (sf)
Moody's also affirmed the ratings of the following notes:
U.S.$221,000,000 Class A-1L Floating
Rate Notes Due 2019 (current outstanding balance of $137,773,591.31),
Affirmed Aaa (sf); previously on March 21, 2013 Affirmed Aaa
(sf)
Up To U.S.$100,000,000 Class A-1LV
Revolving Floating Rate Notes Due 2019 (current outstanding balance of
$62,340,991.10), Affirmed Aaa (sf);
previously on March 21, 2013 Affirmed Aaa (sf)
U.S.$15,000,000 Class B-2L Floating
Rate Notes Due 2019, Affirmed Caa1 (sf); previously on March
21, 2013 Affirmed Caa1 (sf)
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes
are primarily a result of deleveraging of the senior notes and an increase
in the transaction's overcollateralization ratios since the last
rating action in March 2013. Moody's notes that the Class
A-1 Notes have been paid down by approximately 36% or $113.5
million since March 2013. Based on the latest trustee report dated
September 2013, the Class A, Class A-3L, Cass
B-1L, and Class B-2L overcollateralization ratios
are reported at 130.29%, 116.69%,
110.07%, and 104.15%, respectively,
versus February 2013 levels of 120.25%, 111.63%,
107.19%, and 103.10%, respectively.
Notwithstanding benefits of the deleveraging, Moody's notes that
the credit quality of the underlying portfolio has deteriorated since
the last rating action. Based on the September 2013 trustee report,
the weighted average rating factor is currently 2397 compared to 2284
in February 2013.
Moody's notes that the underlying portfolio includes a number of investments
in securities that mature after the maturity date of the notes.
Based on the September 2013 trustee report, securities that mature
after the maturity date of the notes currently make up approximately 4.2%
of the underlying portfolio. All of the long dated securities are
CLO tranches with ratings between Baa1 (sf) and Ba3 (sf). These
investments potentially expose the notes to market risk in the event of
liquidation at the time of the notes' maturity. Notwithstanding
the increase in the overcollateralization ratio of the Class B-2L
Notes, Moody's affirmed the rating of the Class B-2L Notes
due to the market risk posed by the exposure to these long-dated
assets.
Moody's notes that the key model inputs used by Moody's in its analysis,
such as par, weighted average rating factor, diversity score,
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 principal proceeds balance of $284.5
million, defaulted par of $17.5 million, a weighted
average default probability of 15.57% (implying a WARF of
2466), a weighted average recovery rate upon default of 53.41%,
and a diversity score of 42. The 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.
Katonah IX CLO Ltd., issued in November 2006, is a
collateralized loan obligation backed primarily by a portfolio of senior
secured loans, with exposure to CLO tranches.
The principal methodology used in this rating was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in May 2013.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3
of the "Moody's Global Approach to Rating Collateralized Loan Obligations"
rating methodology published in May 2013.
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% (1973)
Class A-1L: 0
Class A-1LV: 0
Class A-2L: 0
Class A-3L: +3
Class B-1L: +2
Class B-2L: +1
Moody's Adjusted WARF + 20% (2959)
Class A-1L: 0
Class A-1LV: 0
Class A-2L: 0
Class A-3L: -1
Class B-1L: 0
Class B-2L: 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 upcoming
speculative-grade debt maturities which may create challenges for
issuers to refinance. CLO notes' performance may also be
impacted by 1) the manager's investment strategy and behavior and
2) divergence in legal interpretation of CLO documentation by different
transactional parties due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Deleveraging: The main source of uncertainty in this transaction
is whether deleveraging from unscheduled principal proceeds will continue
and at what pace. Deleveraging 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.
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 (depending on the extent to which the asset's
maturity lags that of the liabilities) and the asset's current market
value.
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.
Hyuckjae Kwon
Associate 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
Min Xu
VP - Sr Credit Officer/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 $64 million of notes issued by Katonah IX CLO Ltd.
