USD $76.5 million of debt securities affected
New York, March 18, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Centurion CDO III, Limited:
US$32,000,000 Class II Senior Secured Fixed Rate Notes
Due 2013, Upgraded to Aaa (sf); previously on June 22,
2010 Upgraded to Aa2 (sf)
US$27,500,000 Class III Mezzanine Secured Fixed Rate
Notes Due 2013, Upgraded to Aaa (sf); previously on June 22,
2010 Upgraded to Ba3 (sf)
US$1,000,000 Class IV-A Mezzanine Secured Floating
Rate Notes Due 2013, Upgraded to B3 (sf); previously on May
28, 2009 Downgraded to Ca (sf)
US$16,000,000 Class IV-B Mezzanine Secured Fixed
Rate Notes Due 2013, Upgraded to B3 (sf); previously on May
28, 2009 Downgraded to Ca (sf)
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class I Senior Notes, which
have been paid down by approximately $56.9 million,
since the rating action in June 2010. As a result of the delevering,
the overcollateralization ratios have increased since the rating action
in June 2010. As of the latest trustee report dated February 22,
2011, the Senior, Class III Mezzanine, and the Junior
overcollateralization ratios are reported at 262.4%,
141.1% and 109.77%, respectively,
versus June 2010 levels of 159.2%, 121.6%
and 106.12%, respectively. Additionally,
the deal has accumulated enough principal proceeds from asset sales and
unscheduled amortizations to fully collateralize the outstanding principal
balance of the Class I Senior Notes, the Class II Senior Notes,
and the Class III Mezzanine Notes, as well as a significant portion
of the Class IV-A Mezzanine Notes and the Class IV-B Mezzanine
Notes.
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 $80.92 million, defaulted par of $5.65
million, a weighted average default probability of 22.65%
(implying a WARF of 4686), a weighted average recovery rate upon
default of 32.89%, and a diversity score of 11.
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.
Centurion CDO III, Limited, issued in March 2001, is
a collateralized bond obligation backed primarily by a portfolio of senior
unsecured bonds and senior secured loans.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" published in August 2009.
This publication incorporates rating criteria that apply to both collateralized
loan obligations and collateralized bond obligations.
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 2.6 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
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. 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.
For each CE where the related exposure constitutes more than 3%
of the collateral pool, Moody's applied a 2-notch equivalent
assumed downgrade (but only on the CEs representing in aggregate the largest
30% of the pool) in lieu of the aforementioned stresses.
Notwithstanding the foregoing, in all cases the lowest assumed rating
equivalent is Caa3.
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% (3749)
Class I: 0
Class II: 0
Class III: 0
Class IV-A: +1
Class IV-B: +1
Moody's Adjusted WARF +20% (5623)
Class I: 0
Class II: 0
Class III: 0
Class IV-A: 0
Class IV-B: 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 bond and loan markets 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) Lack of portfolio granularity: The performance of the portfolio
depends to a large extent on the credit conditions of a few large obligors,
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
Kai Ang
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
David H. Burger
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 Centurion CDO III, Limited.
