USD $89.7 million of debt securities affected
New York, April 28, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by GSC Capital Corp. Loan Funding
2005-1:
U.S. $25,500,000 Class B Floating Rate
Notes Due 2020, Upgraded to Aa1 (sf); previously on August
7, 2009 Downgraded to Aa2 (sf);
U.S. $16,500,000 Class C Floating Rate
Notes Due 2020, Upgraded to Aa3 (sf); previously on August
7, 2009 Downgraded to A1 (sf);
U.S. $12,000,000 Class D Deferrable Floating
Rate Notes Due 2020, Upgraded to Baa1 (sf); previously on August
7, 2009 Confirmed at Ba1 (sf);
U.S.$ 21,300,000 Class E Deferrable Floating
Rate Notes Due 2020, Upgraded to Ba2 (sf); previously on August
7, 2009 Confirmed at B1 (sf);
U.S.$ 16,200,000 Class F Deferrable Floating
Rate Notes Due 2020 (current outstanding balance of $14,367,642),
Upgraded to Caa1 (sf); previously on August 7, 2009 Downgraded
to Caa3 (sf).
RATINGS RATIONALE
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 transaction's overcollateralization
ratios since the rating action in August 2009. 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 March 22,
2011, the weighted average rating factor is currently 3094 compared
to 3568 in the August 2009 report, and securities rated Caa1 or
lower make up approximately 18.96% of the underlying portfolio
versus 31.96% in August 2009. In addition,
there are currently $13.8 million of defaulted securities
based on the March 2011 trustee report, compared to $28 million
in August 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in August 2009. The Class A/B/C,
Class D, Class E and Class F overcollateralization ratios are reported
at 128.88%, 120.75%, 108.60%
and 101.70%, respectively, versus August 2009
levels of 113.92%, 108.04%, 98.90%
and 92.79%, respectively. In particular,
the Class F overcollateralization ratio has increased in part due to the
diversion of excess interest to delever the Class F notes in the event
of a Class F overcollateralization test failure. Since the rating
action in August 2009, $2.4 million of interest proceeds
have reduced the outstanding balance of the Class F Notes. Moody's
also notes that the Class E and Class F Notes are no longer deferring
interest and that all previously deferred interest has been paid in full.
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 $231.7 million, defaulted par of $13.8
million, a weighted average default probability of 31.69%
(implying a WARF of 4326), a weighted average recovery rate upon
default of 43.43%, and a diversity score of 52.
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.
GSC Capital Corp. Loan Funding 2005-1, issued in January
2006, is a collateralized loan obligation backed primarily by a
portfolio of senior secured loans.
The principal methodology used in this rating was the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology 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.
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
.3% 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.
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, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF -- 20% (3461)
Class A-1: 0
Class A-2: 0
Class B: +1
Class C: +2
Class D: +3
Class E: +2
Class F: +3
Moody's Adjusted WARF + 20% (5191)
Class A-1: 0
Class A-2: 0
Class B: -2
Class C: -2
Class D: -1
Class E: -1
Class F: -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 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 Moody's assumed defaulted assets: Market value fluctuations
in defaulted assets reported by the trustee 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) 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,
weighted average coupon, and diversity score. However,
as part of the base case, Moody's considered spread and coupon
levels higher than the covenant levels due to the large difference between
the reported and covenant levels.
4) Management continuity: GSC Group, Inc. has recently
filed a motion with the bankruptcy court to sell its investment management
contracts. Until a new manager is appointed GSC will continue to
manage the transaction under Chapter 11 protection. There is some
uncertainty as to whether a new manager will be found to take over this
transaction and how well a transition to a new manager is going to be
handled.
Further information on Moody's analysis of this transaction is available
on www.moodys.com.
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
Alena Chen
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 GSC Capital Corp. Loan Funding 2005-1
