USD $193 million of debt securities affected
New York, October 14, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Atrium II:
U.S. $185,000,000 Class A-1 Floating
Rate Notes Due 2016 (current balance of $152,910,962),
Upgraded to Aa1 (sf); previously on June 19, 2009 Downgraded
to Aa3 (sf);
U.S. $12,000,000 Class A-2a Floating
Rate Notes Due 2016, Upgraded to A2 (sf); previously on June
19, 2009 Downgraded to Baa2 (sf);
U.S. $5,000,000 Class A-2b Fixed
Rate Notes Due 2016, Upgraded to A2 (sf); previously on June
19, 2009 Downgraded to Baa2 (sf);
U.S. $11,000,000 Class B Deferrable Floating
Rate Notes Due 2016, Upgraded to Ba1 (sf); previously on June
19, 2009 Downgraded to Ba2 (sf);
U.S. $6,000,000 Class C-1 Floating
Rate Notes Due 2016, Upgraded to Caa1 (sf); previously on June
19, 2009 Downgraded to Caa3 (sf);
U.S. $6,000,000 Class C-2 Fixed
Rate Notes Due 2016, Upgraded to Caa1 (sf); previously on June
19, 2009 Downgraded 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-1 Notes, which
have been paid down by approximately 16% or $29 million
since the last rating action in June 2009. As a result of the delevering,
the overcollateralization ratios have increased since the last rating
action in June 2009. As of the latest trustee report dated September
7, 2010, the Class A, Class B and Class C overcollateralization
ratios are reported at 121.7%, 114.3%
and 107.2%, respectively, versus May 2009 levels
of 107.7%, 102.0% and 96.4%,
respectively. All of the overcollateralization ratios are currently
in compliance. In addition, the Class B and Class C Notes
are no longer deferring interest and all previously deferred interest
has been paid in full.
Moody's notes that the deal has benefited from improvement in the credit
quality of the underlying portfolio since the last rating action.
Moody's adjusted WARF has declined since the last rating action
due to a decrease in the percentage of securities with ratings on "Review
for Possible Downgrade" or with a "Negative Outlook." Furthermore,
based on the September 2010 trustee report, securities rated Caa1
and below make up approximately 10.9% of the underlying
portfolio versus 18.4% in May 2009. The deal also
experienced a decrease in defaults. In particular, the dollar
amount of defaulted securities has decreased to about $6 million
from approximately $20 million in May 2009.
Moody's noted that the underlying portfolio includes a number of investments
in securities that mature after the maturity date of the notes.
Based on the September 2010 trustee report, securities that mature
after the maturity date of the notes currently make up approximately 6.4%
of the underlying portfolio versus 3.3% in May 2009.
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 $203
million, defaulted par of $12 million, weighted average
default probability of 23.21% (implying a WARF of 3551),
a weighted average recovery rate upon default of 41.63%,
and a diversity score of 56. 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.
Atrium II, issued in December 2003, is a collateralized loan
obligation backed primarily by a portfolio of senior secured loans.
The principal methodology used in rating Atrium II was "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009. 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 6 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 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% (2841)
Class A-1: +1
Class A-2a: +2
Class A-2b: +2
Class B: +3
Class C-1: +2
Class C-2: +1
Moody's Adjusted WARF + 20% (4261)
Class A-1: -1
Class A-2a: -2
Class A-2b: -2
Class B: -1
Class C-1: -3
Class C-2: -3
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
equal:
Moody's Adjusted WARR + 2% (43.63)
Class A-1: 0
Class A-2a: 0
Class A-2b: +1
Class B: +1
Class C-1: +1
Class C-2: 0
Moody's Adjusted WARR - 2% (39.63)
Class A-1: 0
Class A-2a: -1
Class A-2b: 0
Class B: 0
Class C-1: -1
Class C-2: -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 managers' investment strategies 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.
4) Weighted average life: The notes' ratings are sensitive
to the weighted average life assumption of the portfolio, which
may be extended due to the manager's decision to reinvest into new
issue loans or other loans with longer maturities and/or participate in
amend-to-extend offerings. Moody's tested for
a possible extension of the actual weighted average life in its analysis.
REGULATORY DISCLOSURES
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 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
Yu Sun
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Shana Sethi
Associate Analyst
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.
Moody's upgrades the ratings of CLO notes issued by Atrium II
