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Related Issuers
Rating Action:

Moody's upgrades the ratings of CLO notes issued by Longhorn CDO III, Ltd.

26 Jul 2011

USD $35 million of debt securities affected

New York, July 26, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Longhorn CDO III, Ltd.:

US $18,000,000 Class C Floating Rate Deferrable Interest Senior Secured Notes, Upgraded to A1 (sf); previously on June 22, 2011 Baa2 (sf) Placed Under Review for Upgrade;

US $4,500,000 Class D-1 Floating Rate Deferrable Interest Senior Secured Notes, Upgraded to Ba3 (sf); previously on June 22, 2011 Caa2 (sf) Placed Under Review for Upgrade;

US $5,900,000 Class D-2 Floating Rate Deferrable Interest Senior Secured Participating Notes, Upgraded to Ba3 (sf); previously on June 22, 2011 Caa2 (sf) Placed Under Review for Upgrade;

US $6,600,000 Class E Floating Rate Deferrable Interest Senior Secured Notes (current balance $6,381,307), Upgraded to Caa3 (sf); previously on June 22, 2011 Ca (sf) Placed Under Review for Upgrade.

RATINGS RATIONALE

According to Moody's, the rating actions taken on the notes are primarily a result of applying Moody's revised CLO assumptions described in "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011. The primary changes to the modeling assumptions include (1) a removal of the temporary 30% default probability macro stress implemented in February 2009 as well as (2) increased BET liability stress factors and increased recovery rate assumptions.

The actions also reflect consideration of delevering of the senior notes since the rating action in April 2011. Moody's notes that the Class A-1 Notes have been paid down by approximately 73% or $26 million since the rating action in April 2011. After applying the payment of principal on the July 10, 2011 payment date, the pro-forma Class A, Class B Class C and Class D overcollateralization ratios are 259.13%, 166.45%, 122.60%, and 106.41%, respectively, versus March 2011 levels of 187.98%, 143.84%, 116.49%, and 104.96%, respectively.

Due to the impact of revised and updated key assumptions referenced in "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011, 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 $84 million, defaulted par of $1.3 million, a weighted average default probability of 12.65% (implying a WARF of 2585), a weighted average recovery rate upon default of 49.37%, and a diversity score of 34. The 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.

Longhorn CDO III, Ltd., issued in March of 2003, 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 June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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 June 2011.

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 2013 and 2015 which may create challenges for issuers to refinance. CLO notes' performance may also be impacted by 1) the manager's investment strategy and behavior and 2) divergence in legal interpretation of CLO 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 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.

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

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's did not receive or take into account a third party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

New York
Raina Patel
Associate Analyst
Structured Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Jian Hu
MD - Structured Finance
Structured Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service, Inc.
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 Longhorn CDO III, Ltd.
No Related Data.
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