USD $16 million of debt securities affected
New York, January 07, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Castle Garden Funding:
U.S. $15,000,000 Class D-1 Floating
Rate Notes Due 2020, Upgraded to Caa3 (sf); previously on November
23, 2010 Ca (sf) Placed Under Review for Possible Upgrade;
U.S. $1,000,000 Class D-2 Fixed
Rate Notes Due 2020, 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 an increase in the transaction's overcollateralization
ratios and improvement in the credit quality of the underlying portfolio
since the rating action on July 23, 2009. In Moody's view,
these positive developments coincide with reinvestment of sale proceeds
and prepayments (including higher than previously anticipated recoveries
realized on defaulted securities) into substitute assets with higher par
amounts and/or higher ratings.
The overcollateralization ratios of the rated notes have improved since
the rating action in July 2009. Based on the November 2010 trustee
report, the Class A, Class B, Class C, and Class
D overcollateralization ratios are reported at 121.69%,
114.11%, 108.90% and 106.67%,
respectively, versus June 2009 levels of 116.53%,
109.28%, 104.28% and 102.15%,
respectively, and all related overcollateralization tests are currently
in compliance.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the last rating action. The weighted
average rating factor in the November report was 2689 compared to 2950
in June 2009, and securities rated Caa1 and below make up approximately
4.2% of the underlying portfolio versus 8.9%
in June 2009. The deal also experienced a decrease in defaulted
securities. In particular, the dollar amount of defaulted
securities has decreased to about $15 million from approximately
$77 million in June 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 $833
million, defaulted par of $15 million, a weighted average
default probability of 30.28% (implying a WARF of 3923),
a weighted average recovery rate upon default of 42.00%,
and a diversity score of 70. 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.
Castle Garden Funding, issued in October 2005, is a collateralized
loan obligation backed primarily by senior secured loans.
The principal methodologies used in rating the notes of this transaction
were "Moody's Approach to Rating Collateralized Loan Obligations,"
published in August 2009 and "Using the Structured Note Methodology
to Rate CDO Combo-Notes," published in February 2004.
Other methodologies and factors that may have been considered in the process
of rating the notes issued by the 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
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 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 loss), assuming
that all other factors are held equal:
Moody's Adjusted WARF - 20% (3138)
Class A-1: +2
Class A-2: +2
Class A-3a: +2
Class A-3b: +2
Class A-4: +3
Class B-1: +2
Class B-2: +2
Class C-1: +3
Class C-2: +3
Class D-1: +2
Class D-2: +3
Class J: +2
Class L: +2
Moody's Adjusted WARF + 20% (4708)
Class A-1: -2
Class A-2: -2
Class A-3a: -2
Class A-3b: -2
Class A-4: -1
Class B-1: -2
Class B-2: -2
Class C-1: -3
Class C-2: -3
Class D-1: 0
Class D-2: 0
Class J: -2
Class L: -2
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
equal:
Moody's Adjusted WARR + 2% (44.00%)
Class A-1: 0
Class A-2: 0
Class A-3a: +1
Class A-3b: 0
Class A-4: +1
Class B-1: +1
Class B-2: +1
Class C-1: +2
Class C-2: +1
Class D-1: 0
Class D-2: 0
Class J: +1
Class L: +1
Moody's Adjusted WARR - 2% (40.00%)
Class A-1: -1
Class A-2: -1
Class A-3a: 0
Class A-3b: -1
Class A-4: 0
Class B-1: 0
Class B-2: 0
Class C-1: -1
Class C-2: -1
Class D-1: 0
Class D-2: 0
Class J: 0
Class L: -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 manager's investment strategy and behavior, 2) divergence
in legal interpretation of CDO documentation by different transactional
parties due to embedded ambiguities, and 3) potential additional
expected loss associated with swap agreements in CDOs as a result of the
recent U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
Sources of additional performance uncertainties are described below:
1) 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.
2) 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.
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 lower 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
Shana Sethi
Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Danielle Nazarian
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 Castle Garden Funding
