USD $82 million of debt securities affected
New York, December 20, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Sequils-Centurion V, Ltd.:
U.S.$408,000,000 Class A Senior Secured
Floating Rate Term Notes Due 2013 (current outstanding balance of $65,106,751),
Upgraded to Aaa (sf); previously on November 23, 2010 Aa2 (sf)
Placed Under Review for Possible Upgrade;
U.S.$30,000,000 Class B Second Priority
Senior Secured Floating Rate Notes Due 2013 (current outstanding balance
of $16,644,440), Upgraded to Aa1 (sf); previously
on November 23, 2010 Baa2 (sf) Placed Under Review for Possible
Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from substantial amortization of the Class A Notes since the
rating action in February 2010. In addition, the credit quality
of the underlying portfolio has been relatively stable since then.
The overcollateralization ratios of the rated notes have improved as a
result of delevering of the Class A Notes, which were paid down
by approximately $75 million or 53% since the rating action
in February 2010. Class A Notes are expected to receive additional
$25 million in principal repayments on the upcoming payment date
at the end of December 2010. As of the November 2010 trustee report,
the First Par Coverage and the Second Par Coverage overcollateralization
ratios are both reported at 1.45, versus December 2009 levels
of 1.19, and all related overcollateralization tests are
currently in compliance. Moody's expects delevering to continue
as a result of the end of the deal's reinvestment period in March 2006.
The credit quality of the underlying portfolio has been relatively stable
since the rating action in February 2010. Based on the November
2010 trustee report, the weighted average rating factor is 3116
compared to 3082 in December 2009, and securities rated Caa1 and
below make up approximately 14.0% of the underlying portfolio
versus 14.3% in December 2009. The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities reported by the trustee has decreased to $7.1
million from approximately $24.8 million in December 2009.
In addition, Moody's notes that the Sequils Credit Swap provides
credit enhancement to the rated notes, and lowering/increasing the
swap threshold or increasing/decreasing the swap balance effectively represents
loss/gain of subordination. The Sequils Credit Swap Threshold has
been unchanged at $39,118,620 since the rating action
in February 2010 while the Sequils Credit Swap Balance has declined from
$16,278,954 in February 2010 to $15,006,105
currently. The credit swap counterparty is Morgan Guaranty Trust
Company of New York, currently rated Aa1 with negative outlook.
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 Moody's assessment, these securities make up approximately
11.6% of the underlying portfolio currently. These
investments potentially expose the notes (especially the junior 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 $87.4
million, defaulted par of $8.6 million, Sequils
Credit Swap Threshold of $39.1 million, Sequils Credit
Swap Balance of $17.7 million (assumed additional swap draw
of $2.7 million), weighted average default probability
of 20.58% (implying a WARF of 4400), a weighted average
recovery rate upon default of 43.64%, and a diversity
score of 22. 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.
Sequils-Centurion V, Ltd, issued in April 2001,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodologies 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.
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% (3520)
Class A: 0
Class B: 0
Moody's Adjusted WARF + 20% (5280)
Class A: 0
Class B: 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
equal:
Moody's Adjusted WARR + 2% (45.64%)
Class A: 0
Class B: 0
Moody's Adjusted WARR - 2% (41.64%)
Class A: 0
Class B: 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, 2)
divergence in legal interpretation of CDO documentation by different transactional
parties due to embedded ambiguities and 3) potential additional expected
loss associated with swap agreements in CDOs as a result of recent U.S.
bankruptcy court ruling on Lehman swap termination in the Dante case.
Sources of additional performance uncertainties are described below:
1) Delevering: The main source of uncertainty in this transaction
is whether delevering from unscheduled principal proceeds will continue
and at what pace. Delevering may accelerate due to high prepayment
levels in the loan market and/or collateral sales by the manager,
which may have significant impact on the notes' ratings.
2) 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.
To some extent, the existence of a credit swap in the deal removes
uncertainties related to timing and ultimate value of recoveries.
3) 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 value.
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
Oktay Veliev
Asst Vice President - 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 Sequils-Centurion V, Ltd.
