USD $399 million of debt securities affected
New York, March 11, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Cannington Funding Ltd.:
U.S.$337,500,000 Class A-1 Floating
Rate Senior Notes Due 2020 (current balance of $313,705,314),
Upgraded to Aaa (sf); previously on June 15, 2009 Downgraded
to Aa2 (sf);
U.S.$26,000,000 Class A-2 Floating
Rate Senior Notes Due 2020, Upgraded to Aa3 (sf); previously
on June 15, 2009 Downgraded to A2 (sf);
U.S.$26,000,000 Class B Floating Rate
Deferrable Senior Subordinate Notes Due 2020, Upgraded to Baa2 (sf);
previously on June 15, 2009 Confirmed at Ba1 (sf);
U.S.$20,000,000 Class C Floating Rate
Deferrable Senior Subordinate Notes Due 2020, Upgraded to Ba3 (sf);
previously on June 15, 2009 Downgraded to B2 (sf);
U.S. $14,000,000 Class D Floating Rate
Deferrable Subordinate Notes Due 2020 (current balance of $13,729,460),
Upgraded to Caa1 (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 an increase in the overcollateralization ratios of the
rated notes since the rating action in June 2009. As of the latest
trustee report dated January 19, 2011, the Class A,
B, C, and D overcollateralization ratios are reported at 121.35%,
112.72%, 106.78%, and 103.2%,
respectively, versus May 2009 levels of 112.75%,
105.22%, 100.8%, and 96.78%,
respectively, and all related overcollateralization tests are currently
in compliance. The increase in overcollateralization is largely
driven by delevering of the Class A Notes due to prior overcollateralization
ratio failures, sales of defaulted securities at recoveries higher
than previously anticipated, and lower overcollateralization haircut
amounts from discount obligations and excess securities rated Caa1 and
below. The deal also experienced a decrease in defaults.
In particular, the dollar amount of defaulted securities has decreased
to about $5 million from approximately $25 million in May
2009. Furthermore, Moody's observes that recent credit quality
of mezzanine and junior CLO tranches held in the underlying portfolio
have stabilized or improved.
Moody's notes that its analysis takes into account the current constraints
around reinvesting in additional collateral obligations relating to the
failure to satisfy certain reinvestment criteria. As a result,
the deal has been accumulating cash since September 2009. As of
the latest trustee report dated January 2011, the principal collections
account balance is $156,053,731. In its analysis,
Moody's assumed that the portfolio is static and that the current
outstanding principal collections along with future amortizations are
held in a reserve account until the end of the reinvestment period.
After the end of the reinvestment period, the cash is released from
the reserve account for application in accordance to the priority of payments.
Should circumstances change in the future and the deal is allowed to reinvest,
Moody's will reconsider its modeling assumptions accordingly.
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 of $261 million, principal
proceeds balance of $156 million, defaulted par of $5
million, a weighted average default probability of 31.3%
(implying a WARF of 4440), a weighted average recovery rate upon
default of 39%, and a diversity score of 38. These
default and recovery properties of the collateral pool are incorporated
in Moody's 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.
Cannington Funding Ltd. issued on November 16, 2006,
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% (3552)
Class A1: 0
Class A2: +2
Class B: +2
Class C: +2
Class D: +2
Moody's Adjusted WARF + 20% (5328)
Class A1: -2
Class A2: -2
Class B: -2
Class C: -2
Class D: -3
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) Reinvestment of cash: The main source of uncertainty in this
transaction is whether cash will be used for future reinvestments or redemption
of the notes. Currently, pursuant to Section 12.2
of the indenture, the deal is prohibited from reinvesting due to
a failure to meet certain reinvestment criteria. As a result,
the deal holds $156 million in principal collections. Due
to the constraints around reinvesting, Moody's assumed that
the portfolio is static and that the current outstanding principal collections
along with future amortizations are held in a reserve account earning
Libor until the end of the reinvestment period. After the amortization
period, the cash is released from the reserve account for application
in accordance to the priority of payments. Should circumstances
change in the future that will allow the deal to reinvest, Moody's
will reconsider its modeling assumptions accordingly.
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 and the asset's current market value.
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
Shan Lai
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Jian Hu
MD - Structured Finance
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 Cannington Funding Ltd.
