USD $8.9million of debt securities affected
New York, February 15, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Latitude CLO II, Ltd.:
U.S. $9,500,000 Class D Fourth Priority
Deferrable Floating Rate Notes Due 2018 (current outstanding balance of
$8,955,390.48), Upgraded to Caa3 (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 the stable credit quality of the underlying portfolio
since the rating action in August 2010.
The overcollateralization ratios of the rated notes have improved in part
due to the higher reported carrying values for defaulted securities,
discount securities, and securities rated Caa1 and below.
As of the latest trustee report dated January 20, 2011, the
Class A, Class B, Class C, and Class D overcollateralization
ratios are reported at 129.85%, 112.98%,
106.18%, and 102.05%, respectively,
versus July 2010 levels of 129.71%, 112.85%,
106.07%, and 101.89%, 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 August 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, Class B, Class C, and Class
D are 131.29%, 114.23%, 107.36%
and 103.18%, respectively, versus August 2010
levels of 129.32%, 112.51%, 105.75%
and 101.63%, respectively.
The stable credit quality is observed through a small 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 2713 compared to 2730 in July 2010,
and securities rated Caa1 and below make up approximately 8.7%
of the underlying portfolio versus 9.9% in July 2010.
However, the deal experienced a small increase in defaults.
In particular, the dollar amount of defaulted securities has increased
to approximately $20.7 million from $19.6
million in July 2010.
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 $233
million, defaulted par of $22.4 million, weighted
average default probability of 29.0% (implying a WARF of
4013), a weighted average recovery rate upon default of 41.4%,
and a diversity score of 58. 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.
Latitude CLO II, Ltd., issued on August 3, 2006,
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, where a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF - 20% (3210)
Class A-1: +0
Class A-2: +2
Class B: +2
Class C: +3
Class D: +1
Moody's Adjusted WARF + 20% (4816)
Class A-1: 0
Class A-2: -2
Class B: -1
Class C: -2
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 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) 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.
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.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, 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 Latitude CLO II, Ltd.
