USD $115 million of debt securities affected
New York, April 07, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by NewStar Commercial Loan Trust 2007-1:
U.S.$58,500,000 Class C Notes due 2022,
Upgraded to Baa3 (sf); previously on September 2, 2009 Confirmed
at Ba1 (sf);
U.S.$27,000,000 Class D Notes due 2022,
Upgraded to Ba2 (sf); previously on September 2, 2009 Confirmed
at Ba3 (sf);
U.S.$29,100,000 Class E Notes due 2022,
Upgraded to Caa1 (sf); previously on September 2, 2009 Confirmed
at Caa2 (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
largely from moderate improvement in the overcollateralization of the
notes due to delevering of the Class A-1 Notes, which have
been paid down by approximately 4% or $13.8 million
since the last rating action in August 2009. Additionally,
the Class E Notes are no longer deferring interest and all previously
deferred interest has been paid in full. Moody's also notes that
the credit profile of the underlying portfolio has been relatively stable
since the last rating action. Based on the February 2011 trustee
report, the weighted average rating factor is 3498 compared to 3590
in August 2009. However, the Moody's adjusted WARF has deteriorated
due to additional stresses applied on stale credit estimates.
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 $583
million (including Class A-2 notes unfunded exposure of $68
million), charged-off securities of $20.7 million,
a weighted average default probability of 35.7% (implying
a WARF of 5210), a weighted average recovery rate upon default of
42%, and a diversity score of 39. These default and
recovery properties of the collateral pool are incorporated in Moody's
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.
NewStar Commercial Loan Trust 2007-1, issued on June 5,
2007, is a collateralized loan obligation backed primarily by a
portfolio of senior secured loans of middle market issuers.
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.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default
probability stresses by assuming an equivalent of Caa3 for CEs that were
not updated within the last 15 months. In addition, Moody's
applied a 1.5 notch-equivalent assumed downgrade for CEs
last updated between 12-15 months ago, and a 0.5 notch-equivalent
assumed downgrade for CEs last updated between 6-12 months ago.
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% (4168)
Class A-1: +1
Class A-2: +1
Class B: +2
Class C: +2
Class D: +2
Class E: +3
Moody's Adjusted WARF + 20% (6252 )
Class A-1: -2
Class A-2: -2
Class B: -2
Class C: -2
Class D: -1
Class E: -3
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 manager's 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 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.
2) Exposure to credit estimates: The deal is exposed to a large
number of securities whose default probabilities are assessed through
credit estimates. In the event that Moody's is not provided the
necessary information to update the credit estimates in a timely fashion,
the transaction may be impacted by any default probability stresses Moody's
may assume in lieu of updated credit estimates.
3) 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.
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. However,
as part of the base case, Moody's considered spread and coupon
levels higher than the covenant levels due to the large difference between
the reported and covenant levels.
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
Shan Lai
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 NewStar Commercial Loan Trust 2007-1
