USD $11 million of debt securities affected
New York, January 19, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Northwoods Capital VII, Limited:
U.S. $10,000,000 Class E Deferrable Floating
Rate Notes Due October 22, 2021 (current outstanding balance of
$11,129,853), Upgraded to Caa2 (sf); previously
on November 23, 2010 Ca (sf) Placed Under Review for Possible Upgrade.
According to Moody's, the rating action taken on the notes
results primarily from an increase in the senior overcollateralization
ratio of the notes since the rating action in September 2009. As
of the latest trustee report dated December 19, 2010, the
senior overcollateralization ratio is reported at 137.7%
versus an August 2009 level of 126.0%. In Moody's
view, these positive developments coincide with reinvestment of
sale proceeds (including higher than previously anticipated recoveries
realized on defaulted securities) into substitute assets with higher par
amounts and/or higher ratings. Additionally, the deal has
benefitted from the diversion of excess interest to the principal collection
account as a result of cumulative losses exceeding a $5 million
threshhold. The diverted amount, called the loss replenishment
amount, is calculated by comparing cumulative losses on trading
activity and defaults with cumulative gains and prior amounts diverted
in excess of the threshold. Although the Class E Notes are presently
deferring due to this diversion feature, Moody's expects the
diversion of interest to cease within the next few payment dates and current
interest payments on Class E Notes to resume.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the rating action in September 2009.
Based on the December 2010 trustee report, the weighted average
rating factor is 3106 compared to 3098 in August 2009, and securities
rated Caa1 and below make up approximately 13.6% of the
underlying portfolio versus 14.9% in August 2009.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to about $20
million from approximately $48 million in August 2009.
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 $501
million, defaulted par of $20 million, weighted average
default probability of 38.31% (implying a WARF of 4841),
a weighted average recovery rate upon default of 39.28%,
and a diversity score of 35. 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.
Northwoods Capital VII, Limited, issued in September of 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
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 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% (3873)
Class A-1: +2
Class A-2: +2
Class A-3: +1
Class A-4: +2
Class B: +2
Class C: +2
Class D: +2
Class E: +2
Moody's Adjusted WARF + 20% (5809)
Class A-1: -2
Class A-2: -2
Class A-3: -1
Class A-4: -2
Class B: -2
Class C: -2
Class D: -2
Class E: -4
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% (41.28%)
Class A-1: 0
Class A-2: 0
Class A-3: +1
Class A-4: 0
Class B: +1
Class C: 0
Class D: +1
Class E: 0
Moody's Adjusted WARR - 2% (37.28%)
Class A-1: -1
Class A-2: -1
Class A-3: 0
Class A-4: -1
Class B: -1
Class C: -1
Class D: 0
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 manager's 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. 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.
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 Northwoods Capital VII, Limited
250 Greenwich Street
New York, NY 10007