New York, May 08, 2014 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by US Capital Funding III, Ltd.:
Issuer: US Capital Funding III, Ltd.
U.S. $111,000,000 Class A-1 Floating
Rate Senior Notes Due 2035 (current balance of $42,469,110.25),
Upgraded to A3 (sf); previously on July 3, 2013 Affirmed Baa2
(sf)
U.S. $23,000,000 Class A-2 Floating
Rate Senior Notes Due 2035, Upgraded to Baa2 (sf); previously
on July 3, 2013 Affirmed Ba1 (sf)
U.S. $39,100,000 Class B-1 Floating
Rate Senior Subordinate Notes Due 2035, Upgraded to Caa2 (sf);
previously on July 3, 2013 Affirmed Ca (sf)
U.S. $48,000,000 Class B-2 Fixed/Floating
Rate Senior Subordinate Notes Due 2035, Upgraded to Caa2 (sf);
previously on July 3, 2013 Affirmed Ca (sf)
US Capital Funding III, Ltd., issued on November 4,
2004, is a collateralized debt obligation backed by a portfolio
of bank trust preferred securities (TruPS).
Moody's Investors Service has also upgraded the ratings of the following
units issued by USCF III 2.5% Combination Security Trust:
Issuer: USCFIII 2.5% Combination Security Trust -
Series A
U.S. $7,500,000 Series A Trust Units
(current rated balance of $5,745,446), Upgraded
to B2 (sf); previously on July 3, 2013 Affirmed Caa2 (sf)
USCF III 2.5% Combination Security Trust, established
on November 29, 2004, is a trust that issued a combination
note comprised of a fraction of Class B-1 notes, Class B-2
notes, Income Notes and a Fannie Mae Strip with a face value of
$3.5 million that matures Nov 15, 2029.
RATINGS RATIONALE
According to Moody's, today's upgrade is primarily the
result of the deleveraging of the Class A-1 notes, an increase
in the transaction's over-collateralization ratios,
and the resumption of interest payments by an asset that had been previously
deferring.
Moody's observed that the Class A-1 notes have been paid
down by approximately 19% or $9 million since the last rating
action in July 2013, due to the diversion of excess interest proceeds
and the disbursement of $7 mm of principal proceeds from the redemption
of one underlying asset. Also, one deferring asset,
with a balance of $7 mm, has cured and resumed interest payments.
As a result of this deleveraging, the Class A1 notes' par coverage
improved by 57.89% to 307.28% as calculated
by Moody's. Based on the latest trustee report dated March
3, 2014, the Senior Principal Coverage Test was 191.9%
(limit 130.0%), versus 158.98% as of
June 3, 2013 and Senior Subordinate Coverage test was 83.28%
as of June 3, 2013 (limit 103.98%).
Going forward, the Class A-1 notes will continue to benefit
from the diversion of excess interest proceeds and from principal proceeds
coming from future redemptions of any assets in the collateral pool.
However, the availability of excess interest proceeds will be reduced
once the hedge strike rate steps up on September 2014 from 5% to
9.3%.
In addition, an Event of Default (EoD) analysis was performed in
Moody's evaluation. An EoD will trigger if there is a default
on the payment of interest on Class A or B and its remedies are either
acceleration or liquidation,. However these remedies require
two thirds (66 2/3%) of each class voting separately. Moody's
believes that the likelihood of a voting to accelerate or liquidate is
very low since either remedy will benefit only the senior notes.
Moody's notes that the key model inputs used by Moody's in its analysis,
such as par, weighted average rating factor, and weighted
average recovery rate, are based on its published methodology and
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 of $130.5 million, defaulted/deferring
par of $44.15 million, a weighted average default
probability of 17.75% (implying a WARF of 789), Moody's
Asset Correlation of 23.02%, and a weighted average
recovery rate upon default of 10%. In addition to the quantitative
factors that are explicitly modeled, qualitative factors are part
of rating committee considerations. Moody's considers the structural
protections in the transaction, the risk of triggering an Event
of Default, recent deal performance under current market conditions,
the legal environment, and specific documentation features.
All information available to rating committees, including macroeconomic
forecasts, inputs from other Moody's analytical groups, market
factors, and judgments regarding the nature and severity of credit
stress on the transactions, may influence the final rating decision.
Methodology Underlying the Rating Action
The principal methodology used in these ratings was "Moody's Approach
to Rating TRUP CDOs," published in May 2011. Please see the
Credit Policy page on www.moodys.com for a copy of this
methodology.
Factors that Would Lead to an Upgrade or Downgrade of the Rating:
This transaction is subject to a number of factors and circumstances that
could lead to either an upgrade or downgrade of the ratings, as
described below:
1) Macroeconomic uncertainty: TruPS CDOs performance could be negatively
affected by uncertainty about credit conditions in the general economy.
Moody's has a stable outlook on the US banking sector.
2) Portfolio credit risk: Credit performance of the assets collateralizing
the transaction that is better than Moody's current expectations
could have a positive impact on the transaction's performance.
Conversely, asset credit performance weaker than Moody's current
expectations could have adverse consequences on the transaction's
performance.
3) Deleveraging: One source of uncertainty in this transaction is
whether deleveraging from unscheduled principal proceeds and excess interest
proceeds will continue and at what pace. Note repayments that are
faster than Moody's current expectations could have a positive impact
on the notes' ratings, beginning with the notes with the highest
payment priority.
4) Resumption of interest payments by deferring assets: A number
of banks have resumed making interest payments on their TruPS.
The timing and amount of deferral cures could have significant positive
impact on the transaction's over-collateralization ratios and the
ratings on the notes.
5) Exposure to non-publicly rated assets: The deal contains
a large number of securities whose default probability Moody's assesses
through credit scores derived using RiskCalc™ or credit estimates.
Moody's evaluates the sensitivity of the ratings of the notes to the volatility
of these credit assessments.
Loss and Cash Flow Analysis:
Moody's modeled the transaction's portfolio using CDOROM™
v.2.12-2 to develop the default distribution from
which it derives the Moody's Asset Correlation parameter. Moody's
then used the parameter as an input in a cash flow model using CDOEdge.
CDOROM™ v.2.12-2 is available on www.moodys.com
under Products and Solutions -- Analytical models,
upon receipt of a signed free license agreement.
The portfolio of this CDO contains trust preferred securities issued by
small to medium sized U.S. community banks that Moody's
does not rate publicly. To evaluate the credit quality of bank
TruPS that do not have public ratings, Moody's uses RiskCalc™,
an econometric model developed by Moody's Analytics, to derive credit
scores. Moody's evaluation of the credit risk of most of the bank
obligors in the pool relies on FDIC Q4-2013 financial data.
In addition to the base case, Moody's conducted a number of sensitivity
analyses of the results to certain key factors driving the ratings.
Moody's analyzed the sensitivity of the model results to changes
in the portfolio WARF (representing an improvement or deterioration in
the credit quality of the collateral pool). Increasing the WARF
by 111 points from the base case of 789 lowers the model-implied
rating on the Class A-1 notes by one notch from the base case result.
Decreasing the WARF by 119 points from the base case raises the model-implied
rating by one notch.
Moody's also conducted two additional sensitivity analyses, as described
in "Sensitivity Analyses on Deferral Cures and Default Timing for Monitoring
TruPS CDOs," published in August 2012. In the first analysis,
Moody's gave par credit to banks that are deferring interest on their
TruPS but satisfy other credit criteria and thus are highly likely to
resume interest payments; in this case, Moody's gave par credit
to $14.15 million of bank TruPS.
In the second sensitivity analysis, Moody's ran alternative default-timing
profile scenarios to reflect the lower likelihood of a large spike in
defaults. Below is a summary of the impact on all of the rated
notes (in terms of the difference in the number of notches versus the
current model-implied output, in which a positive difference
corresponds to a lower expected loss):
Sensitivity Analysis 1: Par Credit Given to Deferring Banks
Class A-1: +1
Class A-2: +2
Class B-1: +3
Class B-2: +3
Series A Trust: 0
Sensitivity Analysis 2: Alternative Default Timing Profile
Class A-1: 0
Class A-2: 0
Class B-1: +3
Class B-2: +3
Series A Trust: +1
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions of the disclosure form.
Moody's did not receive or take into account a third-party
assessment on the due diligence performed regarding the underlying assets
or financial instruments related to the monitoring of these transactions
in the past six months.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
As the section on loss and cash flow analysis describes, Moody's
quantitative analysis entails an evaluation of scenarios that stress factors
contributing to sensitivity of ratings and take into account the likelihood
of severe collateral losses or impaired cash flows. Moody's
weights the impact on the rated instruments based on its assumptions of
the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Rachid Ouzidane
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Rodrigo Araya
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's upgrades the ratings of TruPS CDO notes issued by US Capital Funding III, Ltd. and of units issued by USCF III 2.5% Combination Security Trust
