USD $231 million of debt securities affected
New York, April 21, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Armstrong Loan Funding, Ltd.:
U.S.$133,320,000 Class B Floating Rate
Senior Secured Notes Due 2016 (current outstanding balance of $130,428,375),
Upgraded to Aaa (sf); previously on August 23, 2010 Upgraded
to Aa1 (sf);
U.S.$30,300,000 Class C Floating Rate
Senior Secured Notes Due 2016 (current outstanding balance of $29,642,813),
Upgraded to Aa1 (sf); previously on August 23, 2010 Upgraded
to A1 (sf);
U.S.$36,360,000 Class D Floating Rate
Senior Secured Deferrable Interest Notes Due 2016 (current outstanding
balance of $35,571,375), Upgraded to A2 (sf);
previously on August 23, 2010 Upgraded at Baa3 (sf);
U.S.$18,180,000 Class E Floating Rate
Senior Secured Deferrable Interest Notes Due 2016 (current outstanding
balance of $17,785,688), Upgraded to Baa3 (sf);
previously on August 23, 2010 Upgraded at B1 (sf);
U.S.$18,180,000 Class F Floating Rate
Senior Secured Deferrable Interest Notes Due 2016 (current outstanding
balance of $17,785,688), Upgraded to B1 (sf);
previously on August 23, 2010 Upgraded to Caa3 (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class A Notes and improvement in
the credit quality of the underlying portfolio since the last rating action
in August 2010.
The overcollateralization ratios of the rated notes have improved substantially
as a result of delevering of the Class A Notes, which have been
paid down by approximately 49% or $68 million since the
last rating action in August 2010. A substantial proportion of
this paydown is attributable to principal prepayments on the underlying
loans. As of the latest trustee report dated February 28,
2011, the Class C, Class D, Class E and Class F overcollateralization
ratios are reported at 149.12%, 129.15%,
121.05%, and 113.9%, respectively,
versus July 2010 levels of 133.37%, 120.11%,
114.43%, and 109.25%, respectively.
Additionally, the Class F Notes are no longer deferring interest
and all previously deferred interest has been paid in full.
Moody's also notes that the deal has benefited from improvement in the
credit quality of the underlying portfolio since the last rating action.
Based on the February 2011 trustee report, the weighted average
rating factor is 3046 compared to 3309 in July 2010, and securities
rated Caa1 and below or CCC+ and below make up approximately 10.75%
of the underlying portfolio versus 12.28% in July 2010.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to $15
million from approximately $31.3 million in July 2010.
While the transaction has benefited from delevering, Moody's
noted that the number of investments in securities that mature after the
maturity date of the notes has grown as a result of the deal's decision
to participate in amend to extend activities. As of the February
2011 trustee report, securities that mature after the maturity date
of the notes make up approximately 14% of the underlying portfolio
versus 6.8% in July 2010. These investments potentially
expose the notes to market risk in the event of liquidation at the time
of the notes' maturity.
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 $345.2
million, defaulted par of $15 million, weighted average
default probability of 25.4% (implying a WARF of 3855),
a weighted average recovery rate upon default of 44.2%,
and a diversity score of 38. 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.
Armstrong Loan Funding, Ltd. issued on March 19, 2008,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in these ratings was "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009.
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 six months.
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 August 2009.
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, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF - 20% (3084)
Class A: 0
Class B: 0
Class C: 0
Class D: +2
Class E: +2
Class F: +2
Moody's Adjusted WARF + 20% (4626)
Class A: 0
Class B: 0
Class C: -1
Class D: -2
Class E: -1
Class F: -1
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 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 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 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 value.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and 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.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit 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 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.
New York
Shan Lai
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Leon Mogunov
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades the ratings of CLO notes issued by Armstrong Loan Funding, Ltd.
