USD $298 million of debt securities affected
New York, February 08, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Katonah III, Ltd.:
US $321,000,000 Class A Floating Rate Notes Due 2015
(current outstanding balance of $226,010,812.7),
Upgraded to Aaa (sf); previously on November 23, 2010 Aa3 (sf)
Placed Under Review for Possible Upgrade;
US $17,000,000 Class B-1 Floating Rate Notes
Due 2015, Upgraded to Baa1 (sf); previously on November 23,
2010 Ba1 (sf) Placed Under Review for Possible Upgrade;
US $23,000,000 Class B-2 Fixed Rate Notes Due
2015, Upgraded to Baa1 (sf); previously on November 23,
2010 Ba1 (sf) Placed Under Review for Possible Upgrade;
US $13,000,000 Class C-1 Floating Rate Notes
Due 2015, Upgraded to Ba2 (sf); previously on November 23,
2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
US $4,000,000 Class C-2 Fixed Rate Notes Due
2015, Upgraded to Ba2 (sf); previously on November 23,
2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
US $12,000,000 Class D-1 Floating Rate Notes
Due 2015, Upgraded to Caa2 (sf); previously on November 23,
2010 Ca (sf) Placed Under Review for Possible Upgrade;
US $2,500,000 Class D-2 Fixed Rate Notes Due
2015, Upgraded to Caa2 (sf); previously on November 23,
2010 Ca (sf) Placed Under Review for Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily due to an increase in the transaction's overcollateralization
ratios, and improvement in the credit quality of the underlying
portfolio since the rating action in August 2009.
The overcollateralization ratios of the rated notes have improved in part
as a result of amortization of the Class A Notes, which have been
paid down by approximately $36.0 million or 14% since
the rating action in August 2009. As of the latest trustee report
dated January 18, 2011, the Class A, Class B,
Class C, and Class D overcollateralization ratios are reported at
143.9%, 122.2%, 114.9%,
and 109.3%, respectively, versus July 2009 levels
of 130.9%, 113.6%, 107.5%,
and 102.8%, respectively.
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. Based on the January 2011 trustee report,
the weighted average rating factor is 2658 compared to 3022 in July 2009,
and securities rated Caa1 and below make up approximately 6% of
the underlying portfolio versus 13% in July 2009. The deal
also experienced a decrease in defaults. In particular, the
dollar amount of defaulted securities has decreased to approximately $1.9
million from $43.0 million in July 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 $322
million, defaulted par of $4.3 million, weighted
average default probability of 22.5% (implying a WARF of
3414), a weighted average recovery rate upon default of 42.4%,
and a diversity score of 49. 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.
Katonah III, Ltd., issued on April 18, 2002,
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 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.
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:
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% (2731)
Class A: +1
Class B-1: +1
Class B-2: +1
Class C-1: +1
Class C-2: +2
Class D-1: +3
Class D-2: +3
Moody's Adjusted WARF + 20% (4097)
Class A: -1
Class B-1: -2
Class B-2: -2
Class C-1: -2
Class C-2: -2
Class D-1: -2
Class D-2: -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 managers' 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 deals' 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) 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
value.
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 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.
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
Aniket Deshpande
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 Katonah III, Ltd.
