USD $26 million of debt securities affected
New York, April 06, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by First Dominion Funding III:
U.S.$26,250,000 Class C Floating Rate
Notes Due 2014 (current outstanding balance of $25,965,100),
Upgraded to B3 (sf); previously on August 3, 2009 Downgraded
to Caa3 (sf).
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class B Notes and Class C Notes.
Class B Notes were paid off in full on the March 2011 payment date and
Class C received a principal payment of $284,900, or
1% on the March 2011 payment date. In addition to principal
pay downs, excess spread is being diverted to pay down Class C Notes
as a result of the failure of Class D overcollateralization ratio.
As a result of the delevering, the Class C overcollateralization
ratio has increased since the rating action in August 2009. As
of the latest trustee report dated March 15, 2011, the Class
C overcollateralization ratio before the principal paydown is reported
at 132.54%, versus July 2009 level of 107.22%.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the last rating action. Securities
rated Caa1 and below make up approximately 32.75% of the
underlying portfolio versus 41.9% in July 2009. The
deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to about $29
million from approximately $69 million in July 2009.
Notwithstanding the positive effect of delevering, Moody's
notes that the deal's diversity score is only 12 according to the
March 15, 2011 trustee report, and that the Class C Notes'
expected losses depends to a large extent on the credit conditions of
a few large obligors.
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 $29.2 million, defaulted par of $36.4
million, a weighted average default probability of 19.40%
(implying a WARF of 4243), a weighted average recovery rate upon
default of 28.25%, and a diversity score of 10.
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 Dominion Funding III, issued in December 1999, is a
collateralized loan obligation backed primarily by a portfolio of senior
The principal methodology used in this rating 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
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 184.108.40.206 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 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. 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. 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
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.
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.
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of CLO notes issued by First Dominion Funding III
250 Greenwich Street
New York, NY 10007