USD $278 million of debt securities affected
New York, April 27, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Black Diamond International Funding,
Ltd.:
U.S.$490,000,000 Senior Variable Funding
Note Due January 15, 2016 (current outstanding balance of $114,521,317),
Upgraded to Aaa (sf); previously on September 25, 2009 Downgraded
to A1 (sf);
U.S.$700,000,000 Series 2005-A
Medium Term Notes Due July 17, 2017 (current outstanding balance
of $163,601,881), Upgraded to Aaa (sf);
previously on September 25, 2009 Downgraded to A1 (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Senior Variable Funding Note and
Series 2005-A Medium Term Notes, which have been paid down
by approximately 74% or $784.6 million since the
rating action in September 2009. As a result of the delevering,
the overcollateralization ratio has increased since the rating action
in September 2009. As of the latest trustee report dated April
4, 2011, the overcollateralization ratio is reported at 179.38%
versus a September 2009 level of 132.43%. In addition,
Moody's notes that the overcollateralization ratio does not reflect
the $84 million payment of the notes on the most recent payment
date.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the last rating action. Based
on the April 2011 trustee report, the weighted average rating factor
is 3631 compared to 3558 in September 2009. The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities has decreased to about $104 million from
approximately $214 million in September 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 balance
of $543 million, defaulted par of $109 million,
a weighted average default probability of 38.85% (implying
a WARF of 6338), a weighted average recovery rate upon default of
43.85%, and a diversity score of 15. 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.
Black Diamond International Funding, Ltd., issued in
June 2005, is a collateralized loan obligation backed primarily
by a portfolio of senior secured loans.
The principal methodology used in this rating was the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009.
The other methodology used in this rating was the "Updated Approach
to the Usage of Credit Estimates in Rated Transactions" rating methodology
published in October 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, due to the low diversity of
the collateral pool, CDOROM 2.8 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
Moody's also supplemented its modeling with individual scenario
analysis to assess the ratings impact of jump-to-default
by certain large obligors.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default
probability stresses by assuming an equivalent of Caa3 for CEs that were
not updated within the last 15 months, which currently account for
approximately 16% of the collateral balance. In addition,
Moody's applied a 1.5 notch-equivalent assumed downgrade
for CEs last updated between 12-15 months ago, and a 0.5
notch-equivalent assumed downgrade for CEs last updated between
6-12 months ago.
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, where a positive difference corresponds
to lower expected loss), assuming that all other factors are held
equal:
Moody's Adjusted WARF -- 20% (5070)
Senior Variable Funding Note: 0
Series 2005-A Medium Term Notes: 0
Moody's Adjusted WARF + 20% (7606)
Senior Variable Funding Note: 0
Series 2005-A Medium Term Notes: 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 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 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: The deal is exposed to a
large number of securities whose default probabilities are assessed through
credit estimates. 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. 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. Lack of portfolio granularity: The performance of the
portfolio depends to a large extent on the credit conditions of a few
large obligors that are rated, especially when they experience jump
to default. Due to the deal's low diversity score and lack
of granularity, Moody's supplemented its typical Binomial
Expansion Technique analysis with a simulated default distribution using
Moody's CDOROMTM software and/or individual scenario analysis.
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
Shana Sethi
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 Black Diamond International Funding, Ltd.
