USD $471 million of debt securities affected
New York, February 17, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Sapphire Valley CDO I, Ltd.:
U.S. $5,000,000 Class X Notes Due 2013
(current balance of $1,819,519), Upgraded to
Aaa (sf); previously on October 16, 2009 Downgraded to Aa3
U.S.$418,500,000 Class A Senior Notes
Due 2022 (current balance of $356,047,464), Upgraded
to Baa2 (sf); previously on October 16, 2009 Downgraded to
U.S.$73,000,000 Class B Senior Notes
Due 2022, Upgraded to Ba2 (sf); previously on October 16,
2009 Downgraded to B1 (sf);
U.S.$20,000,000 Class C Deferrable Mezzanine
Notes Due 2022, Upgraded to B3 (sf); previously on November
23, 2010 Ca (sf) Placed Under Review for Possible Upgrade;
U.S.$20,000,000 Class D Deferrable Mezzanine
Notes Due 2022, Upgraded to Caa3 (sf); previously on March
25, 2009 Downgraded to Ca (sf).
According to Moody's, the rating actions taken on the notes result
primarily from an increase in the overcollateralization ratios of the
rated notes since the rating action in October 2009. Moody's notes
that the overcollateralization ratios of the rated notes have improved
in part due to delevering of the Class A Notes, which have been
paid down by approximately 11.8% or $47.6
million since the rating action in October 2009. Available principal
proceeds are being diverted to pay down the Class A Notes as a result
of continued failure of the Class E overcollateralization ratio test.
The Class E overcollateralization ratio has increased in part due to a
turbo feature in the deal whereby excess interest is diverted to delever
the Class E Notes in the event of a Class E overcollateralization ratio
test failure. Furthermore, the overcollateralization ratios
have also improved due to a decrease in the number of defaulted CLO tranches.
A number of CLO tranches were defaulted and carried at depressed market
values in the rating action in October 2009 but are currently treated
as performing securities due to improved credit qualities. As of
the latest trustee report dated January 5, 2011, the Class
A/B, Class C, Class D, and Class E overcollateralization
ratios are reported at 114.15%, 109.14%,
104.54%, and 100.73%, respectively,
versus September 2009 levels of 102.83%, 98.69%,
94.87%, and 91.67%, respectively.
The transaction is exposed to a significant concentration in mezzanine
and junior CLO tranches in the underlying portfolio. Based on the
latest trustee report, CLO Securities currently held in the portfolio
total about $142.6 million, accounting for approximately
26.4% of the collateral balance. Moody's observes
that recent credit qualities in mezzanine and junior CLO tranches in the
underlying portfolio have stabilized or improved.
The rating action on the Class X Notes in October 2009 took into consideration
the increased risk of an event of default, which has been mitigated
since then. This is reflected in part in the upgrade rating action
on the Class X Notes.
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 $541
million, defaulted par of $2.5 million, a weighted
average default probability of 45.2% (implying a WARF of
5505), a weighted average recovery rate upon default of 33.9%,
and a diversity score of 56. 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.
Sapphire Valley CLO I, Ltd. issued on December 14,
2006, is a collateralized loan obligation backed primarily by a
portfolio of senior secured loans and CLO securities.
The principal methodology used in these ratings 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 126.96.36.199 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 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
Moody's Adjusted WARF - 20% (4404)
Class X: 0
Class A: +3
Class B: +3
Class C: +3
Class D: +4
Class E: +2
Moody's Adjusted WARF + 20% (6606)
Class X: 0
Class A: -2
Class B: -2
Class C: -4
Class D: -2
Class E: -1
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) 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. In addition,
as part of the base case, Moody's considered a lower diversity score
due to the large concentration of CLO tranches.
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.
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
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of CLO notes issued by Sapphire Valley CDO I, Ltd.
250 Greenwich Street
New York, NY 10007