USD $309 million of debt securities affected
New York, September 02, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by FriedbergMilstein Private Capital Fund
U.S.$325,500,000 Class A First Priority
Senior Secured Floating Rate Delayed Draw Notes Due January 15,
2019 (current outstanding balance of $204,001,956),
Upgraded to Aaa (sf); previously on July 2, 2009 Downgraded
to Aa1 (sf);
U.S.$54,100,000 Class B-1 Second
Priority Secured Floating Rate Notes Due January 15, 2019,
Upgraded to A1 (sf); previously on July 2, 2009 Downgraded
to A3 (sf);
U.S.$17,000,000 Class B-2 Second
Priority Secured Fixed Rate Notes Due January 15, 2019, Upgraded
to A1 (sf); previously on July 2, 2009 Downgraded to A3 (sf);
U.S.$20,750,000 Class C-1 Third
Priority Secured Deferrable Floating Rate Notes Due January 15,
2019, Upgraded to Baa3 (sf); previously on July 2, 2009
Confirmed at Ba1 (sf);
U.S.$13,000,000 Class C-2 Third
Priority Secured Deferrable Fixed Rate Notes Due January 15, 2019,
Upgraded to Baa3 (sf); previously on July 2, 2009 Confirmed
at Ba1 (sf).
According to Moody's, the rating actions taken on the notes
result primarily from improvement in the credit quality of the underlying
portfolio and an increase in the overcollateralization ratios of the notes
since the last rating action in July 2009 due to delevering of the Class
A notes of approximately 35% or $108.2 million.
As of the latest trustee report dated August 2, 2010, the
Class A/B, Class C, and Class D overcollateralization ratios
are reported at 138.1%, 123.0%,
and 110.1%, respectively, versus June 2009 levels
of 121.4%, 111.5%, and 103.0%,
respectively. In Moody's view, these positive developments
coincide with reinvestment of sale proceeds (including higher than previously
anticipated recoveries realized on defaulted securities) into substitute
assets with higher par amounts and/or higher ratings. In addition,
the Class C-1 and Class C-2 Notes are no longer deferring
interest and all previously deferred interest has been paid in full.
Moody's also notes that the deal has benefited from improvement in the
credit quality of the underlying portfolio since the last rating action.
Based on the August 2010 trustee report, the weighted average rating
factor is 3080 compared to 3228 in June 2009. The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities has decreased to about $84 million from
approximately $106 million in June 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 of $373
million, defaulted par of $86 million, weighted average
default probability of 33.36% (implying a WARF of 4562),
a weighted average recovery rate upon default of 34.65%,
and a diversity score of 48. 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.
FriedbergMilstein Private Capital Fund I, issued in December of
2004, is a small and middle market collateralized loan obligation.
The principal methodologies used in rating FriedbergMilstein Private Capital
Fund I were "Moody's Approach to Rating Collateralized Loan Obligations"
published in August 2009, "Using the Structured Note Methodology
to Rate CDO Combo-Notes" published in February 2004,
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 6 months.
Moody's modeled the transaction using the Binomial Expansion Technique.
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.
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 a number of sensitivity analyses to test the impact on all rated
notes, including the following:
1. Various default probabilities to capture potential defaults
in the underlying portfolio.
2. A range of recovery rate assumptions for all assets to capture
variability in recovery rates.
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, whereby
a positive difference corresponds to lower expected losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (3650)
Class A: 0
Class B-1: +2
Class B-2: +2
Class C-1: +2
Class C-2: +2
Class D-1: +2
Class D-2: +2
Combination Securities: +3
Moody's Adjusted WARF + 20% (5474)
Class A: -1
Class B-1: -2
Class B-2: -2
Class C-1: -2
Class C-2: -2
Class D-1: -3
Class D-2: -3
Combination Securities: -2
Below is a summary of the impact of different recovery rate levels on
all rated notes (shown in terms of the number of notches' difference versus
the current model output, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
Moody's Adjusted WARR + 2% (36.7%)
Class A: 0
Class B-1: 0
Class B-2: 0
Class C-1: 0
Class C-2: 0
Class D-1: +1
Class D-2: +1
Combination Securities: +2
Moody's Adjusted WARR - 2% (32.7%)
Class A: 0
Class B-1: -1
Class B-2: -1
Class C-1: -1
Class C-2: -1
Class D-1: -1
Class D-2: -1
Combination Securities: +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 managers' investment strategies and behavior, 2)
divergence in legal interpretation of CDO documentation by different transactional
parties due to embedded ambiguities, and 3) potential additional
expected loss associated with swap agreements in CDOs as a result of recent
U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
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 deals' overcollateralization levels.
Further, the timing of recoveries and the manager's decision
to work out versus selling 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) Other collateral quality metrics: 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,
and weighted average coupon. Additionally, however,
in light of the large positive difference between the reported and covenant
levels for weighted average recovery rate and diversity score, as
well as consideration of the approaching end of the reinvestment period
in January 2011, Moody's believes that the manager's
ability to deteriorate these collateral quality metrics is more limited.
As a result, Moody's base case analysis incorporates the impact
of assuming the midpoint of reported and covenanted values for the weighted
average recovery rate and diversity score.
4) 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.
5) The deal has a pay-fixed receive-floating interest rate
swap that is currently out of the money. If fixed rate assets prepay
or default, there would be a more substantial mismatch between the
swap notional and the amount of fixed assets, resulting in larger
cash payments to the hedge counterparty. In such cases, payments
to hedge counterparties may consume a large portion or all of the interest
proceeds, leaving the transaction, even with respect to the
senior notes, with poor interest coverage. Payment timing
mismatches between assets and liabilities may cause additional concerns.
If the deal does not receive sufficient projected principal proceeds on
the payment date to supplement the interest proceeds shortfall,
a heightened risk of interest payment default could occur. Similarly,
if principal proceeds are used to pay interest, there may ultimately
be a risk of payment default on the principal of the notes.
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.
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.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit 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.
Senior Vice President
Structured Finance Group
Moody's Investors Service
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of CLO notes issued by FriedbergMilstein Private Capital Fund I
250 Greenwich Street
New York, NY 10007