USD $52 million of debt securities affected
New York, February 18, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Wasatch CLO Ltd.:
U.S.$29,000,000 Class C Senior Secured
Deferrable Floating Rate Notes due 2022, Upgraded to B3 (sf);
previously on November 23, 2010 Caa2 (sf) Placed Under Review for
U.S.$13,000,000 Class D Secured Deferrable
Floating Rate Notes due 2022, Upgraded to Caa3 (sf); previously
on November 23, 2010 C (sf) Placed Under Review for Possible Upgrade;
U.S.$7,400,000 Type I Composite Notes
due 2022 (current Rated Balance of 4,588,096), Upgraded
to B1 (sf); previously on October 5, 2009 Downgraded to B2
U.S.$10,000,000 Type III Composite Notes
due 2022 (current Rated Balance of 5,494,833), Upgraded
to B1 (sf); previously on October 5, 2009 Downgraded to B3
According to Moody's, the rating actions taken on the notes result
primarily from improvement in the credit quality of the underlying portfolio
and an increase in the overcollateralization ratios of the notes since
the rating action in October 2009.
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 defaults. In particular, as of
the latest trustee report dated January 2011, the weighted average
rating factor is currently 2781 compared to 2868 in the August 2009 report.
Defaulted securities total about 3 million of the underlying portfolio
compared to 61 million in August 2009. In addition, the proportion
of securities from issuers rated Caa1 and below is 6.42%
currently, compared to 8.64% in August 2009.
The overcollateralization ratios of the rated notes have also improved
since the last rating action. The Class A, B, C and
D OC levels are 123.56%, 114.01%,
108.29% and 105.91% respectively, versus
August 2009 levels of 117.48%, 108.40%,
102.97% and 100.66% respectively, and
all related overcollateralization tests are currently in compliance.
In addition, the Class D notes are no longer PIKing, and all
deferred interest has been repaid.
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 balance, including principal
proceeds, of $620.5 million, defaulted par of
$9.2 million, weighted average default probability
of 34.2%(implying a WARF of 4165), a weighted average
recovery rate upon default of 41.57%, and a diversity
score of 70. 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.
Wasatch CLO Ltd., issued in May 2007, is a collateralized
loan obligation backed primarily by a portfolio of senior secured loans.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009,
and "Using the Structured Note Methodology to Rate CDO Combo-Notes"
published in February 2004.
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 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, where
a positive difference corresponds to lower expected loss), assuming
that all other factors are held equal:
Moody's Adjusted WARF + 20% (4998)
Class A-1a: -3
Class A-1b: -3
Class A2: -2
Class B: -2
Class C: -5
Class D: -1
Type I composite: -2
Type III composite: -2
Moody's Adjusted WARF - 20% (3332)
Class A-1a: +2
Class A-1b: +2
Class A2: +3
Class B: +2
Class C: +2
Class D: +3
Type I composite: +2
Type III composite: +2
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, 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) 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.
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 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.
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's information.
Moody's Investors Service considers the quality of information available
on the issuer 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.
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 Wasatch CLO Ltd.
250 Greenwich Street
New York, NY 10007