USD $275 million of debt securities affected
New York, May 27, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by First 2004 CLO-II Ltd.:
U.S.$50,000,000 Class A-1 Senior
Secured Delayed Drawdown Notes Due 2016 (current outstanding balance of
$37,483,317), Upgraded to Aaa (sf); previously
on July 31, 2010 Downgraded to Aa2 (sf);
U.S.$250,000,000 Class A-2 Senior
Secured Notes Due 2016 (current outstanding balance of $187,416,583),
Upgraded to Aaa (sf); previously on July 31, 2010 Downgraded
to Aa2(sf);
U.S. $30,000,000 Class B Senior Secured
Interest Deferrable Notes Due 2016, Upgraded to A1 (sf); previously
on July 31, 2010 Confirmed at Ba1 (sf);
U.S.$20,000,000 Class C Senior Secured
Interest Deferrable Notes Due 2016, Upgraded to Baa3 (sf);
previously on July 31, 2010 Confirmed at B1(sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class A-1 Notes and Class
A-2 Notes, which have been paid down by approximately $9
million and $45 million, respectively, since the rating
action in July 2009. As a result of the delevering, the overcollateralization
ratios have increased since the rating action in July 2009. As
of the latest trustee report dated May 4, 2011, the Class
A, Class B, and Class C overcollateralization ratios are reported
at 135.7%, 119.8%, and 111.1%,
respectively, versus July 2009 levels of 121.0%,
109.2%, and 102.6%, respectively,
and all related overcollateralization tests are currently in compliance.
Moody's assumes a distribution of approximately $58 million
of principal proceeds, reported in the May 2011 trustee report,
will be made to the Class A-1 Notes and Class A-2 Notes
on the next payment date in June.
Moody's also notes that the credit profile of the underlying portfolio
has improved since the last rating action. Based on the May 2011
trustee report, the weighted average rating factor is 2584 compared
to 2854 in July 2009, and securities rated Caa1 and below make up
approximately 8.3% of the underlying portfolio versus 17.5%
in July 2009. The deal also experienced a decrease in defaults.
In particular, the dollar amount of defaulted securities has decreased
to about $3.2 million from approximately $23.4
million in July 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 $305 million, defaulted par of $3.2 million,
a weighted average default probability of 21.17% (implying
a WARF of 3294), a weighted average recovery rate upon default of
45%, and a diversity score of 46. 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.
First 2004-II CLO, Ltd., issued in December
14, 2004, is a collateralized loan obligation, backed
primarily by a portfolio of senior secured loans.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" 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.
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, where a positive difference corresponds
to lower expected loss), assuming that all other factors are held
equal:
Moody's Adjusted WARF -- 20% (2635)
Class A1: 0
Class A2: 0
Class B: +2
Class C: +2
Moody's Adjusted WARF + 20% (3953)
Class A1: 0
Class A2: 0
Class B: -2
Class C: -2
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.
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
Raina Patel
Associate 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 First 2004 CLO-II Ltd.
