USD $286 million of debt securities affected
New York, November 24, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Avenue CLO Fund, Ltd.:
U.S.$286,000,000 Class A-1L Floating
Rate Notes Due 2017 (current outstanding balance of $205,031,303),
Upgraded to Aaa (sf); previously on June 17, 2009 Downgraded
to Aa3 (sf);
U.S.$34,000,000 Class A-2L Floating
Rate Notes Due 2017, Upgraded to A2 (sf); previously on June
17, 2009 Downgraded to Baa3 (sf);
U.S.$19,000,000 Class A-3L Floating
Rate Notes Due 2017, Upgraded to Baa3 (sf); previously on June
17, 2009 Downgraded to Ba3 (sf);
U.S.$9,000,000 Class B-1L Floating
Rate Notes Due 2017, Upgraded to B3 (sf); previously on June
17, 2009 Downgraded to Ca (sf);
U.S.$10,000,000 Class B-1F 6.59%
Notes Due 2017, Upgraded to B3 (sf); previously on June 17,
2009 Downgraded to Ca (sf);
U.S.$10,000,000 Class B-2L Floating
Rate Notes Due 2017 (current outstanding balance of $9,154,856),
Upgraded to Caa3 (sf); previously on June 17, 2009 Downgraded
to C (sf).
According to Moody's, the rating actions taken on the notes result
primarily due to the amortization of the Class A-1L Notes and improvement
in the credit quality of the underlying portfolio since the last rating
action in June 2009.
The overcollateralization ratios of the rated notes have improved as a
result of delevering of the Class A-1L Notes, which have
amortized by approximately $78 million or 28% since the
previous rating action in June 2009. As of the October 2010 trustee
report, the Senior Class A, Class A, Class B-1,
and Class B-2L overcollateralization ratios are reported at 124.0%,
114.9%, 107.0%, and 103.61%,
respectively, versus May 2009 levels of 112.6%,
106.3%, 100.6%, and 96.69%,
respectively, and all related overcollateralization tests are currently
in compliance. Moody's expects delevering to continue as a result
of the end of the deal's reinvestment period in February 2010.
Improvement in the credit quality is observed through an improvement in
the average credit rating (as measured by the weighted average rating
factor) and a decrease in the proportion of securities from issuers rated
Caa1 and below. Based on the October 2010 trustee report,
the weighted average rating factor is 2451 compared to 2755 in May 2009,
and securities rated Caa1 and below make up approximately 5% of
the underlying portfolio versus 11% in May 2009. Moody's
adjusted WARF has also 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." The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities has decreased to $23.3mm from approximately
$39.0 million in May 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 $291 million,
defaulted par of $23 million, weighted average default probability
of 23.6% (implying a WARF of 3500), a weighted average
recovery rate upon default of 42.1%, and a diversity
score of 46. 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.
Avenue CLO Fund Ltd., issued on December 20, 2004,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" rating methodology published in
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 22.214.171.124 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% (2800)
Class A-1L: 0
Class A-2L: +2
Class A3L: +2
Class B-1L: +1
Class B-1F: +1
Class B-2L: +1
Moody's Adjusted WARF + 20% (4200)
Class A-1L: -1
Class A-2L: -1
Class A3L: -1
Class B-1L: -3
Class B-1F: -3
Class B-2L: -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 loss), assuming that all other factors are held
Moody's Adjusted WARR + 2% (44.1%)
Class A-1L: 0
Class A-2L: +1
Class A3L: +1
Class B-1L: +0
Class B-1F: +0
Class B-2L: +0
Moody's Adjusted WARR - 2% (40.1%)
Class A-1L: 0
Class A-2L: 0
Class A3L: 0
Class B-1L: -1
Class B-1F: -1
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 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
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.
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.
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of CLO notes issued by Avenue CLO Fund Ltd.
250 Greenwich Street
New York, NY 10007