USD $444 million of debt securities affected
New York, February 03, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Kingsland IV Ltd.:
U.S.$308,100,000 Class A-1 Senior
Secured Floating Rate Notes Due 2021 (current balance of $304,300,554),
Upgraded to Aa3 (sf); previously on May 20, 2010 Upgraded to
A1 (sf);
U.S.$60,000,000 Class A-1R Senior
Secured Revolving Floating Rate Notes Due 2021 (current balance of $59,260,088),
Upgraded to Aa3 (sf); previously on May 20, 2010 Upgraded to
A1 (sf);
U.S.$22,900,000 Class B Senior Secured
Floating Rate Notes Due 2021, Upgraded to Baa1 (sf); previously
on May 20, 2010 Upgraded to Baa2 (sf);
U.S.$25,000,000 Class C Senior Secured
Deferrable Floating Rate Notes Due 2021, Upgraded to Ba1 (sf);
previously on May 20, 2010 Upgraded to Ba2 (sf);
U.S.$18,000,000 Class D Senior Secured
Deferrable Floating Rate Notes Due 2021, Upgraded to B2 (sf);
previously on Nov 23, 2010 Caa1 (sf) Placed Under Review for Possible
Upgrade;
U.S.$14,900,000 Class E Secured Deferrable
Floating Rate Notes Due 2021, Upgraded to Caa3 (sf); previously
on Nov 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 from an improvement in Moody's calculated overcollateralization
ratios since the rating action in July 2010.
The reported overcollateralization ratios of the rated notes have improved
slightly since the rating action in July 2010. The Class A/B,
Class C, Class D, and Class E overcollateralization ratios
are reported at 119.44%, 112.19%,
107.48%, and 103.88%, respectively,
versus June 2010 levels of 119.03%, 111.80%,
107.11% and 103.52%, respectively,
and all related overcollateralization tests are currently in compliance.
Notably, however, Moody's analysis of collateral coverage
is based on adjusted overcollateralization ratios that have improved by
more than the trustee-reported improvement due to a decrease in
the percentage of securities with Ca or C ratings. Consistent with
its rating surveillance assumptions, Moody's treated Ca or C-rated
securities as defaulted securities in its analysis leading to the rating
action in July 2010. In its current analysis, Moody's is
treating such securities which have benefited from having their ratings
upgraded above previous Ca or C rating levels as performing assets.
In particular, the current Moody's calculated overcollateralization
ratios for the Class A/B, Class C, Class D and Class E are
119.42%, 112.17%, 107.47%
and 103.86%, respectively, versus July 2010
levels of 116.72%, 109.63%, 105.03%
and 101.51%, respectively.
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 balance, including principal
proceeds balance, of $461 million, defaulted par of
$4 million, a weighted average default probability of 25.28%
(implying a WARF of 3164), a weighted average recovery rate upon
default of 40.33%, and a diversity score of 50.
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.
Kingsland IV, Ltd., issued in February 2007,
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 sensitivity analysis 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 losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF -- 20% (2531)
Class A1: +2
Class A1R: +2
Class B: +3
Class C: +2
Class D: +2
Class E : +2
Moody's Adjusted WARF + 20% (3797)
Class A1: -2
Class A1R: -2
Class B: -2
Class C: -2
Class D: -3
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 managers' investment strategy 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 the
recent U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
Sources of additional performance uncertainties are described below:
1) 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.
2) 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 and the asset's current market value.
3) 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.
4) 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 worse of reported and covenanted values
for weighted average rating factor, weighted average spread,
weighted average coupon, and diversity score. Additionally,
in light of the large positive difference between the reported and covenant
levels for the weighted average spread, Moody's considered the impact
of assuming the midpoint of the Moody's calculated weighted average
spread and the covenant in its analysis.
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
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
Karie Chen
Asst Vice President - 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 Kingsland IV, Ltd.
