USD $308 million of debt securities affected
New York, January 28, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Baker Street Funding 2005-1 CLO:
US $234,000,000 Class A-1 Floating Notes (current
balance of $227,044,047), Upgraded to Aa2 (sf);
previously on June 5, 2009 Downgraded to Aa3 (sf);
US $35,000,000 Class A-2 Notes (current commitment
balance of $33,959,579 and current outstanding balance
of $27,359,579), Upgraded to Aa2 (sf); previously
on June 5, 2009 Downgraded to Aa3 (sf);
US $20,000,000 Class B Notes, Upgraded to A3
(sf); previously on June 5, 2009 Downgraded to Baa1 (sf);
US $18,000,000 Class C Notes, Upgraded to Ba1
(sf); previously on June 5, 2009 Downgraded to Ba3 (sf);
US $9,400,000 Class E Notes, Upgraded to Caa3
(sf); previously on November 23, 2010 Ca (sf) Placed Under
Review for Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes
result primarily from improvement in the credit quality of the underlying
portfolio and an increase in the overcollateralization ratios of the notes
since the rating action in June 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. In particular, as of the latest trustee report
dated January 3, 2011, the weighted average rating factor
is currently 2335 compared to 2474 in the May 2010 report, and securities
rated Caa1 or lower make up approximately 9.5% of the underlying
portfolio versus 11.0% in May 2010. Moody's
adjusted WARF has declined since the rating action in June 2010 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 defaulted securities. Defaults now
total about $10 million of the underlying portfolio compared to
$13 million in May 2010.
The overcollateralization ratios of the rated notes have also improved
since the ration action in June 2010. The Class A/B, Class
C, Class D, and Class E overcollateralization ratios are reported
at 119.41%, 112.22%, 106.95%
and 103.84%, respectively, versus May 2010 levels
of 117.30%, 110.24%, 105.07%,
and 102.01%, respectively. All related overcollateralization
tests are currently in compliance.
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 balance, including principal
proceeds, of $329.1 million, defaulted par of
$10.3 million, weighted average default probability
of 23.65% (implying a WARF of 3198), a weighted average
recovery rate upon default of 43.79%, and a diversity
score of 60. 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.
Baker Street Funding 2005-1 CLO, issued in December 2005,
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. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found on Moody's
website.
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, whereby
a positive difference corresponds to lower expected losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2558)
Class A1: +2
Class A2: +2
Class B: +3
Class C: +2
Class D: +2
Class E: +2
Moody's Adjusted WARF + 20% (3838)
Class A1: -2
Class A2: -2
Class B: -2
Class C: -2
Class D: -3
Class E: 0
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, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARR + 2% (45.79%)
Class A1: 0
Class A2: 0
Class B: 0
Class C: +1
Class D: 0
Class E: 0
Moody's Adjusted WARR - 2% (41.79%)
Class A1: -1
Class A2: -1
Class B: -1
Class C: 0
Class D: 0
Class E: 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) 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.
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 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) Other collateral quality metrics: The deal is allowed to reinvest
and the manager has the ability to deteriorate the collateral quality
metrics' existing cushions against the covenant levels. Moody's
analyzed the impact of assuming worse of reported and covenanted values
for weighted average rating factor, weighted average spread,
weighted average coupon, and diversity score.
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
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
Suzanna Sava
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Ramon O. Torres
Senior Vice President
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 Baker Street Funding 2005-1 CLO
