USD $22 million of debt securities affected
New York, December 10, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Morgan Stanley Investment Management
$14,000,000 Class B Senior Floating Rate Notes Due
2018 Notes, Upgraded to A2 (sf); previously on July 6,
2009 Downgraded to A3 (sf);
$4,000,000 Class B Senior Fixed Rate Notes Due 2018
Notes, Upgraded to A2 (sf); previously on July 6, 2009
Downgraded to A3 (sf);
$4,000,000 Class E Deferrable Mezzanine Floating Rate
Notes Due 2018 Notes, Upgraded to Caa3 (sf); previously on
November 23, 2010 Ca (sf) Placed Under Review for Possible Upgrade.
According to Moody's, the rating actions taken on the notes
result primarily from improvement in the credit quality of the underlying
portfolio and an increase in the overcollateralization ratios of the notes
since the last rating action in July 2009. 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.
In particular, as of the latest trustee report dated November 5,
2010, the weighted average rating factor is currently 2414 compared
to 2704 in the June 2009 report, and securities rated Caa1/CCC+
or lower make up approximately 7.4% of the underlying portfolio
versus 13.4% in June 2009. Additionally, defaulted
securities total about $4.5 million of the underlying portfolio
compared to $10.8 million in June 2009.
The overcollateralization ratios of the rated notes have also improved
since the last rating action. The senior and mezzanine overcollateralization
ratios are reported at 118.35% and 104.84%,
respectively, versus June 2009 levels of 111.42% and
98.91%, respectively, and all overcollateralization
tests are currently in compliance. Moody's also notes that
the Class E Notes are no longer deferring interest and that all previously
deferred interest has been paid in full.
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 of $279
million, defaulted par of $4.5 million, weighted
average default probability of 25.66% (implying a WARF of
3266), a weighted average recovery rate upon default of 44.33%,
and a diversity score of 68. 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.
Morgan Stanley Investment Management Croton, Ltd.,
issued in December 2005, 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.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
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,
as described in Section 18.104.22.168 of the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009. In addition, due to the low diversity of
the collateral pool, CDOROM 2.6 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
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, where
a positive difference corresponds to lower expected loss), assuming
that all other factors are held equal:.
Moody's Adjusted WARF -- 20% (2613)
Class A-1: +1
Class A-2: +1
Class B Fixed: +2
Class B Floating: +3
Class C: +2
Class D: +1
Class E: +2
Moody's Adjusted WARF + 20% (3919)
Class A-1: -2
Class A-2: -2
Class B Fixed: -2
Class B Floating: -2
Class C: -2
Class D: -3
Class E: -1
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, where a positive difference corresponds
to lower expected loss), assuming that all other factors are held
Moody's Adjusted WARR + 2% (46.33%)
Class A-1: 0
Class A-2: 0
Class B Fixed: +1
Class B Floating: +1
Class C: 0
Class D: 0
Class E: +1
Moody's Adjusted WARR - 2% (42.33%)
Class A-1: -1
Class A-2: -1
Class B Fixed: 0
Class B Floating: 0
Class C: -1
Class D: -1
Class E: 0
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 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 deal's 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.
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. Additionally,
however, in light of the large positive difference between the reported
and covenant levels for weighted average spread, Moody's believes
that the manager's ability to deteriorate these collateral quality metrics
is more limited. As a result, Moody's analysis incorporates
the impact of assuming spread levels between the reported and covenanted
values for the weighted average spread.
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.
Structured Finance Group
Moody's Investors Service
Ramon O. Torres
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of CLO notes issued by Morgan Stanley Investment Management Croton, Ltd.
250 Greenwich Street
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