USD $697 million of debt securities affected
New York, October 28, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Red River CLO Ltd.:
U.S.$657,000,000 Class A Floating Rate
Senior Secured Extendable Notes Due 2018 (current outstanding balance
of $610,377,614.40), Upgraded to A3 (sf);
previously on June 9, 2009 Downgraded to Baa2 (sf);
U.S.$45,000,000 Class B Floating Rate
Senior Secured Extendable Notes Due 2018, Upgraded to Ba1 (sf);
previously on June 9, 2009 Downgraded to Ba3 (sf);
U.S.$40,500,000 Class C Floating Rate
Senior Secured Deferrable Interest Extendable Notes Due 2018, Upgraded
to Caa1 (sf); previously on June 9, 2009 Downgraded to Caa3
According to Moody's, the rating actions taken on the notes
result primarily from delevering of the Class A Notes, 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 June 2009.
The Class A Notes have been paid down by approximately 5% or $34
million since the last rating action in June 2009 as a result of the breach
of all overcollateralization tests. Repayment of the Class A Notes
has come from both principal paydowns as well as diversion of excess spread.
As a result of the delevering, the overcollateralization ratios
have increased since the last rating action in June 2009. Based
on the latest trustee report dated September 30, 2010, the
Class A/B, Class C, Class D and Class E overcollateralization
ratios are reported at 114.47%, 107.81%,
101.26% and 97.13% respectively, versus
May 2009 levels of 108.36%, 102.35%,
96.40% and 92.64%, respectively.
Additionally, the deal will continue to benefit from the continued
delevering of the notes as a result of the diversion of excess interest
proceeds due to the failure of the overcollateralization tests.
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, based on the September 30,
2010 trustee report, the weighted average rating factor is currently
2698 compared to 3354 in the May 2009 report and is currently in compliance
with the trigger level of 2720, and securities rated Caa1/CCC+
or lower make up approximately 10.72% of the underlying
portfolio versus 19.46% in May 2009.
Finally, Moody's notes that the portfolio includes a number
of investments in securities that mature after the maturity date of the
notes. Based on the September 2010 trustee report, securities
that mature after the maturity date of the notes currently make up approximately
3.55% of the underlying portfolio all of which are CLO tranches.
These investments potentially expose the notes to market risk in the event
of liquidation at the time of the notes' maturity.
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 $727
million, defaulted par of $116 million, weighted average
default probability of 30.30% (implying a WARF of 4316),
a weighted average recovery rate upon default of 42.11%,
and a diversity score of 57. 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.
Red River CLO Ltd., issued in August 2006, is a collateralized
loan obligation backed primarily by a portfolio of senior secured loans.
The principal methodologies used in rating Red River CLO Ltd. were
"Moody's Approach to Rating Collateralized Loan Obligations" rating
methodology published in August 2009 and Updated Approach to the Usage
of Credit Estimates in Rated Transactions published in October 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. 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, 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.
For each CE where the related exposure constitutes more than 3%
of the collateral pool, Moody's applied a 2-notch equivalent
assumed downgrade (but only on the CEs representing in aggregate the largest
30% of the pool) in lieu of the aforementioned stresses.
Notwithstanding the foregoing, in all cases the lowest assumed rating
equivalent is Caa3.
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 losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (3453)
Class A: +2
Class B: +1
Class C: +2
Class D: +3
Class E: 0
Moody's Adjusted WARF + 20% (5179)
Class A: -2
Class B: -3
Class C: -3
Class D: 0
Class E: 0
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 losses), assuming that all other factors are held
Moody's Adjusted WARR + 2% (44.11%)
Class A: 0
Class B: 0
Class C: +1
Class D: +1
Class E: 0
Moody's Adjusted WARR - 2% (40.11%)
Class A: -1
Class B: -2
Class C: 0
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 managers' investment strategies and behaviour 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 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) Long-dated assets: The presence of assets that mature
beyond the CLO's legal maturity date exposes the deal to liquidation
risk on those assets. Moody's assumes an asset's terminal
value upon liquidation at maturity to be equal to the lower of an assumed
liquidation value (depending on the extent to which the asset's
maturity lags that of the liabilities) and the asset's current market
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) 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
5) 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.
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.
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.
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.
Asst Vice President - Analyst
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 Red River CLO Ltd.
250 Greenwich Street
New York, NY 10007