U.S. $243 million of debt securities affected
New York, August 19, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Gulf Stream - Compass CLO 2004-1,
U.S. $320,000,000 Class A Floating Rate
Notes due 2016 (current outstanding balance of U.S. $188,561,641),
Upgraded to Aa2 (sf); previously on July 30, 2009 Downgraded
to A2 (sf);
U.S. $34,000,000 Class C Floating Rate
Notes due 2016, Upgraded to Ba1(sf); previously on July 30,
2009 Downgraded to Ba3 (sf);
U.S. $20,000,000 Class D Floating Rate
Deferrable Notes due 2016, Upgraded to Caa3 (sf); previously
on July 30, 2009 Downgraded to Ca (sf).
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class A notes, which have been
paid down by approximately 32.6% or $91.1
million since the last rating action. The overcollateralization
ratios have increased since the last rating action in July 2009.
As of the latest trustee report dated August 3, 2010, the
Senior overcollateralization ratio is reported at 129.2%,
versus July 2009 levels of 113.9%.
Moody's also notes that the credit quality of the portfolio has been relatively
stable since the last rating action. Based on the August 2010 trustee
report, the weighted average rating factor is 2821 compared to 2836
in July 2009. The deal also experienced a decrease in defaults.
In particular, the dollar amount of defaulted securities has decreased
to about $9 million from approximately $30 million in July
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 of $241 million,
defaulted par of $ 16 million, weighted average default probability
of 26.5% (implying a WARF of 3820), a weighted average
recovery rate upon default of 42.9%, and a diversity
score of 64. 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.
Gulf Stream - Compass CLO 2004-1, Ltd.,
issued in August of 2004, is a collateralized loan obligation backed
primarily by a portfolio of senior secured loans.
The principal methodology used in rating Gulf Stream - Compass
CLO 2004-1, Ltd. was "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
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.
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% (3056)
Class A +1
Class C +3
Class D +3
Moody's Adjusted WARF + 20% (4584)
Class A -2
Class C -1
Class D -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 equal:
Moody’s Adjusted WARR + 2% (40.9%)
Class A 0
Class C +1
Class D 0
Moody’s Adjusted WARR - 2% (44.9%)
Class A -1
Class C 0
Class D -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 bond/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) 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
4) 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.
5) Any other parameter sensitivity or scenario run results if 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 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.
VP - Senior Credit Officer
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 Gulf Stream - Compass CLO 2004-1, Ltd.
250 Greenwich Street
New York, NY 10007