USD $66 million of debt securities affected
New York, August 26, 2010 -- Moody's Investors Service announced today that it has upgraded the
ratings of the following notes issued by Signature 7 LP:
U.S.$168,090,000 Class A Floating Rate
Notes MTN Program (current balance of $51,386,832),
Upgraded to A1 (sf); previously on Jul 31, 2009 Downgraded
to A3 (sf);
U.S.$15,085,000 Class B Deferrable Floating
Rate Notes MTN Program, Upgraded to B1 (sf); previously on
Jul 31, 2009 Downgraded to B2 (sf).
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class A Notes, which have been
paid down by approximately 38% or $31.6 million since
the last rating action in July 2009. As a result of the delevering,
the overcollateralization ratios have increased since the last rating
action in July 2009. As of the latest trustee report dated July
16, 2010, the Class A, the Class B, and the Class
C overcollateralization ratios are reported at 156.54%,
125.97% and 109.72%, respectively,
versus July 2009 levels of 142.94%, 120.96%
and 108.21%, respectively.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the last rating action. Based
on the July 2010 trustee report, the weighted average rating factor
is 1762 compared to 1792 in July 2009, and securities rated Caa1
and below make up approximately 6.79% of the underlying
portfolio versus 6.43% in July 2009. The deal also
experienced a decrease in defaults. In particular, the dollar
amount of defaulted securities has decreased to about $11.9
million from approximately $13.9 million in July 2009.
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 $84.95
million, defaulted par of $11.89 million, weighted
average default probability of 25.50% (implying a WARF of
3641), a weighted average recovery rate upon default of 28.28%,
and a diversity score of 26. 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.
Signature 7 LP, issued in July 2004, is a collateralized bond
obligation backed primarily by a portfolio of senior unsecured bonds.
The principal methodologies used in rating Signature 7 LP were the "Moody's
Approach to Rating Collateralized Loan Obligations" rating methodology
published in August 2009 and the "Updated Approach to the Usage
of Credit Estimates in Rated Transactions" rating methodology published
in October 2009. These publications incorporate rating criteria
that apply to both collateralized loan obligations and collateralized
bond obligations. Other methodologies and factors that may have
been considered in the process of rating this issuer can also be found
on Moody's website.
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
Moody's modeled the transaction using the Binomial Expansion Technique.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied a 1.5 notch-equivalent
assumed downgrade for CEs last updated between 12-15 months ago,
and a 0.5 notch-equivalent assumed downgrade for CEs last
updated between 6-12 months ago. For each CE where the related
exposure constitutes more than 3% of the collateral pool,
Moody's applied a 2-notch equivalent assumed downgrade (but
only on the CEs representing in aggregate the largest 30% of the
pool) in lieu of the aforementioned stresses. Notwithstanding the
foregoing, in all cases the lowest assumed rating equivalent is
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 losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2913)
Class A: +2
Class B: +1
Class C: +2
Moody's Adjusted WARF + 20% (4369)
Class A: -1
Class B: -2
Class C: -1
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 losses), assuming that all other factors are held
Moody's Adjusted WARR + 2% (30.28%)
Class A: +1
Class B: 0
Class C: +1
Moody's Adjusted WARR - 2% (26.28%)
Class A: 0
Class B: -1
Class C: 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 behavior, 2)
divergence in legal interpretation of CDO documentation by different transactional
parties due to embedded ambiguities, and 3) potential additional
expected loss associated with swap agreements in CDOs as a result of recent
U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
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 bond 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 deals' 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.
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
4) Exposure to credit estimates: The deal is exposed to a large
number of securities whose default probabilities are assessed through
credit estimates. In the event that Moody's is not provided the
necessary information to update the credit estimates in a timely fashion,
the transaction may be impacted by any default probability stresses Moody's
may assume in lieu of updated credit estimates. Moody's also conducted
stress tests to assess the collateral pool's concentration risk in obligors
bearing a credit estimate that constitute more than 3% of the collateral
5) The deal has a pay-fixed receive-floating interest rate
swap that is currently out of the money. If fixed rate assets prepay
or default, there would be a more substantial mismatch between the
swap notional and the amount of fixed assets, resulting in larger
cash payments to the hedge counterparty. In such cases, payments
to hedge counterparties may consume a large portion or all of the interest
proceeds, leaving the transaction, even with respect to the
senior notes, with poor interest coverage. Payment timing
mismatches between assets and liabilities may cause additional concerns.
If the deal does not receive sufficient projected principal proceeds on
the payment date to supplement the interest proceeds shortfall,
a heightened risk of interest payment default could occur. Similarly,
if principal proceeds are used to pay interest, there may ultimately
be a risk of payment default on the principal of the notes.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, 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.
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.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit 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.
Structured Finance Group
Moody's Investors Service
Ramon O. Torres
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of CBO notes issued by Signature 7 LP
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New York, NY 10007