USD $42.8 million of debt securities affected
New York, March 28, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Fortress Credit Funding II LP:
U.S. $14,000,000 Class A-2 Floating
Rate Senior Delayed Draw Term Notes Due 2017, Upgraded to Aaa(sf);
previously on June 23, 2009 Downgraded to Aa3 (sf);
U.S. $15,800,000 Class A-3 Floating
Rate Senior Term Notes Due 2017, Upgraded to Aa3 (sf); previously
on June 23, 2009 Downgraded to Baa1 (sf);
U.S. $13,000,000 Class B Floating Rate
Senior Subordinated Deferrable Interest Term Notes Due 2017, Upgraded
to Baa1 (sf); previously onJune 23, 2009 Downgraded to Ba1
(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, which
have been paid down by approximately 25.3% or $31.9
million since the rating action in June 2009. This transaction's
Reinvestment Period ended in August 2010. As of the latest trustee
report dated February 15, 2010, the Class A and Class B overcollateralization
ratios are reported at 142.0% and 128.8%,
respectively.
Moody's also notes that the deal has benefited from improvement in the
credit quality of the underlying portfolio since the rating action in
June 2009. Based on the February 2011 trustee report, the
weighted average rating factor is 2740 compared to 3436 in May 2009,
and securities rated Caa1/CCC and below total about $23.8
million of the underlying portfolio versus $38.6 million
in May 2009. Based on the same trustee report, the weighted
average recovery rate is 47.7% compared to 45.3%
in May 2009. The deal also experienced a decrease in defaults.
In particular, the dollar amount of defaulted securities has decreased
to about $3.0 million from approximately $7.3
million in May 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 $177 million, defaulted par of $3.0 million,
a weighted average default probability of 28.2% (implying
a WARF of 4234), a weighted average recovery rate upon default of
41.9%, and a diversity score of 30. 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.
Fortress Credit Funding II LP, issued on September 1, 2005,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans of middle market issuers.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009
and "Updated Approach to the Usage of Credit Estimates in Rated
Transactions" published in October 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.
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, which currently account for
approximately 8.4% of the collateral balance. 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% (5081)
Class A-1: 0
Class A-2: 0
Class A-3: +2
Class V: +2
Moody's Adjusted WARF + 20% (3387)
Class A-1: 0
Class A-2: -1
Class A-3: -2
Class B: -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.
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)Exposure to credit estimates: The deal is exposed to a large number
of securities whose default probabilities are assessed through credit
estimates. In the event that Moody's is not provided the necessary
information to update the credit estimates in a timely fashion,
the transaction may be impacted by any default probability stresses Moody's
may assume in lieu of updated credit estimates. Moody's also conducted
stress tests to assess the collateral pool's concentration risk in obligors
bearing a credit estimate that constitute more than 3% of the collateral
pool. Moody's observed that a significant portion of the
underlying collateral pool consists of such assets.
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
Hongfei Zhang
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 Fortress Credit Funding II LP
