USD $166 million of debt securities affected
New York, February 24, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Fraser Sullivan CLO II Ltd:
U.S.$51,600,000 Class A-2 Senior
Secured Floating Rate Notes, Due 2020, Upgraded to Aa2 (sf);
previously on August 19, 2009 Downgraded to A1 (sf);
U.S.$33,000,000 Class B Senior Secured
Floating Rate Notes, Due 2020, Upgraded to A2 (sf); previously
on October 7, 2010 Upgraded to A3 (sf);
U.S.$32,000,000 Class C Senior Secured
Deferrable Floating Rate Notes, Due 2020, Upgraded to Baa2
(sf); previously on October 7, 2010 Upgraded to Ba1 (sf);
U.S.$33,000,000 Class D Senior Secured
Deferrable Floating Rate Notes, Due 2020, Upgraded to B1 (sf);
previously on October 7, 2010 Upgraded to B3 (sf);
U.S.$17,000,000 Class E Senior Secured
Deferrable Floating Rate Notes, Due 2020, Upgraded to Caa3
(sf); previously on November 23, 2010 Ca (sf) Placed Under
Review for Possible Upgrade.
According to Moody's, the rating actions taken on the notes
result primarily from improvement in the credit quality of the underlying
portfolio since the rating action in October 2010.
Improvement in the credit quality is observed through an improvement in
the average credit rating (as measured by the weighted average rating
factor) and a decrease in the proportion of securities from issuers rated
Caa1 and below. In particular, as of the latest trustee report
dated January 1, 2011, the weighted average rating factor
is currently 2491 compared to 2556 in the September 2010 report,
and securities rated Caa1/CCC+ or lower make up approximately 2.77%
of the underlying portfolio versus 4.01% in September 2010.
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 $478 million, defaulted par of $10 million,
a weighted average default probability of 28.49% (implying
a WARF of 3604), a weighted average recovery rate upon default of
42.62%, 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.
Fraser Sullivan CLO II Ltd., issued in December 2006,
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.
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 22.214.171.124 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
Moody's Adjusted WARF -- 20% (2883)
Class A-1a: 0
Class A-1b: 0
Class A-2: +2
Class B: +3
Class C: +2
Class D: +2
Class E: +3
Moody's Adjusted WARF + 20% (4325)
Class A-1a: -1
Class A-1b: -1
Class A-2: -2
Class B: -1
Class C: -2
Class D: -2
Class E: -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 behaviour 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) 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) 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. However, as part of the base case, Moody's
considered spread levels higher than the covenant levels due to the large
difference between the reported and covenant levels.
Further information on Moody's analysis of this transaction is available
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
David H. Burger
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 Fraser Sullivan CLO II Ltd.
250 Greenwich Street
New York, NY 10007