USD 54 million of debt securities affected
New York, October 11, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Signature 7 L.P.:
U.S.$168,090,000 Class A Floating Rate
Notes Due July 28, 2019 (current outstanding balance of $27,325,273),
Upgraded to Aaa (sf); previously on June 22, 2011 A1 (sf) Placed
Under Review for Possible Upgrade;
U.S.$15,085,000 Class B Deferrable Floating
Rate Notes Due July 28, 2019, Upgraded to A3 (sf); previously
on June 22, 2011 B1 (sf) Placed Under Review for Possible Upgrade;
U.S.$12,930,000 Class C Deferrable Floating
Rate Notes Due July 28, 2019 (current outstanding balance of $11,440,026),
Upgraded to Ba3 (sf); previously on June 22, 2011 Caa3 (sf)
Placed Under Review for Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes
are primarily a result of applying Moody's revised CLO assumptions described
in "Moody's Approach to Rating Collateralized Loan Obligations"
published in June 2011. The primary changes to the modeling assumptions
include (1) a removal of the temporary 30% default probability
macro stress implemented in February 2009 as well as (2) increased BET
liability stress factors and increased recovery rate assumptions.
The actions also reflect consideration of an increase in the transaction's
overcollateralization ratios and delevering of the senior notes since
the rating action in August 2010. Moody's notes that the
Class A Notes have been paid down by approximately 47% or $24.1
million. As a result of the delevering, the overcollateralization
ratios have increased since the rating action in August 2010. Based
on the latest trustee report dated August 18, 2011, the Class
A, Class B and Class C overcollateralization ratios are reported
at 235.19%, 151.54% and 119.34%,
respectively, versus July 2010 levels of 156.54%,
125.97% and 109.72%, respectively.
In particular, the Class C overcollateralization ratio has increased
in part due to the diversion of excess interest to delever the Class C
Notes. Since the rating action in August 2010, $0.2
million of interest proceeds have reduced the outstanding balance of the
Class C Notes by 1.7%.
Due to the impact of revised and updated key assumptions referenced in
"Moody's Approach to Rating Collateralized Loan Obligations" published
in June 2011, 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 $63.8 million, defaulted par of
$7.3 million, a weighted average default probability
of 20.52% (implying a WARF of 3125), a weighted average
recovery rate upon default of 31.49%, and a diversity
score of 22. 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.
Signature 7 L.P., issued in July 2004, is a
collateralized bond obligation backed primarily by a portfolio of senior
unsecured bonds.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" published in June 2011.
This publication incorporates rating criteria that apply to both collateralized
loan obligations and collateralized bond obligations. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
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 June 2011.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied a 1.0
notch-equivalent assumed downgrade for CEs last updated between
12-15 months ago. Additionally, for each security
that does not have a Moody's estimated or public rating, which
represented 10.4% of the portfolio, Moody's
assumed the rating equivalent of Caa3 in its analysis. For each
CE where the related exposure constitutes more than 3% of the collateral
pool, Moody's applied a 2-notch equivalent assumed
downgrade (beginning with CEs relating to the largest single-issuer
exposures, but representing in aggregate no greater than 30%
of the pool) in lieu of the aforementioned stresses. Notwithstanding
the foregoing, in all cases the lowest assumed rating equivalent
is Caa3.
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 2013 and 2015 which may create challenges for issuers
to refinance. CDO notes' performance may also be impacted
by 1) the manager's investment strategy and behavior 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 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 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 (depending on the extent to which the asset's
maturity lags that of the liabilities) and the asset's current market
value.
4) Exposure to credit estimates and securities without a Moody's
rating: The deal is exposed to a large number of securities whose
default probabilities are assessed through credit estimates or do not
have an estimated or public Moody's rating. 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. For securities without a Moody's estimated
or public rating, Moody's assumed a rating equivalent of Caa3
in its analysis. 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 pool.
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. 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.
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
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are considered EU Qualified
by Extension and therefore available for regulatory use in the EU.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
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 considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 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.
Shana Sethi
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
Ramon O. Torres
Senior Vice President
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 CBO notes issued by Signature 7 L.P.
