Moody's also affirms the ratings on USD 58 million of notes
New York, May 13, 2014 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Kingsland I, Ltd.:
U.S. $17,250,000 Class C-1 Senior
Secured Deferrable Floating Rate Notes due June 13, 2019,
Upgraded to Aa1 (sf); previously on December 20, 2013 Upgraded
to Aa2 (sf); and
U.S. $8,750,000 Class C-2 Senior
Secured Deferrable Fixed Rate Notes due June 13, 2019, Upgraded
to Aa1 (sf); previously on December 20, 2013 Upgraded to Aa2
(sf).
Moody's also affirmed the ratings on the following notes:
U.S. $100,000,000 Class A-1a Senior
Secured Delayed Drawdown Notes due June 13, 2019 (current outstanding
balance of $ 3,743,993), Affirmed Aaa (sf);
previously on December 20, 2013 Affirmed Aaa (sf);
U.S. $190,000,000 Class A-lb Senior
Secured Floating Rate Notes due June 13, 2019 (current outstanding
balance of $ 7,113,587), Affirmed Aaa (sf);
previously on December 20, 2013 Affirmed Aaa (sf);
U.S. $10,000,000 Class A-2 Senior
Secured Floating Rate Notes due June 13, 2019, Affirmed Aaa
(sf); previously on December 20, 2013 Affirmed Aaa (sf);
U.S. $17,000,000 Class B-l Senior
Secured Deferrable Floating Rate Notes due June 13, 2019,
Affirmed Aaa (sf); previously on December 20, 2013 Affirmed
Aaa (sf);
U.S. $10,000,000 Class B-2 Senior
Secured Deferrable Fixed Rate Notes due June 13, 2019, Affirmed
Aaa (sf); previously on December 20, 2013 Affirmed Aaa (sf);
U.S. $7,000,000 Class D Secured Deferrable
Floating Rate Notes due June 13, 2019, Affirmed Baa2 (sf);
previously on December 20, 2013 Upgraded to Baa2 (sf); and
U.S. $5,000,000 Type II Composite Notes
due June 13, 2019 (current outstanding rated balance of $
3,268,444), Affirmed Aaa (sf); previously on December
20, 2013 Affirmed Aaa (sf).
Kingsland I Ltd., issued in July 2005, is a collateralized
loan obligation backed primarily by a portfolio of senior secured loans
with significant exposure to unsecured bonds and CLO tranches.
The transaction's reinvestment period ended in June 2011.
RATINGS RATIONALE
These rating actions are primarily a result of deleveraging of the senior
notes and an increase in the transaction's over-collateralization
ratios since the last rating action in December 2013. The Class
A-1a Notes and the Class A-1b Notes have been paid down
by approximately 54% or $13 million since December 2013.
Based on the trustee's April 7, 2014 report, the over-collateralization
(OC) ratios for the Class A, Class B, Class C, and Class
D notes are reported at 473.70%, 206.45%,
133.77% and 122.19%, respectively,
versus December 2013 levels of 258.02%, 168.99%,
126.84% and 118.86%, respectively.
Notwithstanding the benefits of the deleveraging, Moody's
notes the exposure to assets that mature after the transaction's legal
maturity date has increased significantly since the last rating action.
Based on the trustee's April 2014 report, securities that
mature after the transaction's legal maturity date currently make
up 17.6% of the collateral principal amount compared to
1.2% in December 2013. These investments could expose
the notes to market risk in the event of liquidation when the notes mature.
Despite the increase in the OC ratio of the Class D notes, Moody's
affirmed the rating on the Class D notes owing to market risk stemming
from the exposure to these long-dated assets.
The rating actions also reflect the correction of an error in Moody's
previous modeling approach. According to Moody's, its analysis
in the December 2013 rating action assumed a shorter weighted average
life horizon to associate with the expected loss (EL) calculated for the
notes, with the result of comparing such ELs with more conservative
maximum EL benchmarks. The error has now been corrected,
and today's rating actions reflect this change.
Methodology Used for the Rating Action
The principal methodology used in this rating was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in February
2014. 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:
1) Macroeconomic uncertainty: CLO performance is subject to a) uncertainty
about credit conditions in the general economy and b) the large concentration
of upcoming speculative-grade debt maturities, which could
make refinancing difficult for issuers.
2) Collateral Manager: Performance can also be affected positively
or negatively by a) the manager's investment strategy and behavior
and b) differences in the legal interpretation of CLO documentation by
different transactional parties owing to embedded ambiguities.
3) Collateral credit risk: A shift towards collateral of better
credit quality, or better credit performance of assets collateralizing
the transaction than Moody's current expectations, can lead
to positive CLO performance. Conversely, a negative shift
in credit quality or performance of the collateral can have adverse consequences
for CLO performance.
4) Deleveraging: An important source of uncertainty in this transaction
is whether deleveraging from unscheduled principal proceeds will continue
and at what pace. Deleveraging of the CLO could accelerate owing
to high prepayment levels in the loan market and/or collateral sales by
the manager, which could have a significant impact on the notes'
ratings. Note repayments that are faster than Moody's current expectations
will usually have a positive impact on CLO notes, beginning with
those with the highest payment priority.
5) Recovery of defaulted assets: Fluctuations in the market value
of defaulted assets reported by the trustee and those that Moody's assumes
as having defaulted could result in volatility in the deal's OC levels.
Further, the timing of recoveries and whether a manager decides
to work out or sell defaulted assets create additional uncertainty.
6) Long-dated assets: The presence of assets that mature
after the CLO's legal maturity date exposes the deal to liquidation
risk on those assets. This risk is borne first by investors with
the lowest priority in the capital structure. Moody's assumes
that the terminal value of an asset upon liquidation at maturity will
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)
or the asset's current market value. The deal's increased
exposure owing to amendments to loan agreements extending maturities continues.
In light of the deal's sizable exposure to long-dated assets,
which increases its sensitivity to the liquidation assumptions in the
rating analysis, Moody's ran scenarios using a range of liquidation
value assumptions. However, actual long-dated asset
exposures and prevailing market prices and conditions at the CLO's
maturity will drive the deal's actual losses, if any,
from long-dated assets.
7) Post-Reinvestment Period Trading: Subject to certain requirements,
the deal can reinvest certain proceeds after the end of the reinvestment
period, and as such the manager has the ability to erode some of
the collateral quality metrics to the covenant levels. Such reinvestment
could affect the transaction either positively or negatively. In
particular, Moody's tested for a possible extension of the
actual weighted average life in its analysis given that the post-reinvestment
period reinvesting criteria has loose restrictions on the weighted average
life of the portfolio.
In addition to the base case analysis, Moody's also conducted sensitivity
analyses to test the impact of a number of default probabilities on the
rated notes. Below is a summary of the impact of different default
probabilities (expressed in terms of WARF) on all of the rated notes (by
the difference in the number of notches versus the current model output,
for which a positive difference corresponds to lower expected loss):
Moody's Adjusted WARF -- 20% (1468)
Class A-1a: 0
Class A-1b: 0
Class A-2: 0
Class B-1: 0
Class B-2: 0
Class C-1: 0
Class C-2: 0
Class D: +2
Type II Composite Note: 0
Moody's Adjusted WARF + 20% (2201)
Class A-1a: 0
Class A-1b: 0
Class A-2: 0
Class B-1: 0
Class B-2: 0
Class C-1: -2
Class C-2: -2
Class D: -2
Type II Composite Note: 0
Loss and Cash Flow Analysis:
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in Section 2.3
of the "Moody's Global Approach to Rating Collateralized Loan Obligations,"
published in February 2014.
The key model inputs Moody's used in its analysis, such as
par, weighted average rating factor, diversity score and the
weighted average recovery rate, are based on its published methodology
and could differ from the trustee's reported numbers. In its base
case, Moody's analyzed the collateral pool as having a performing
par and principal proceeds balance of $96 million, defaulted
par of $6 million, a weighted average default probability
of 8.69% (implying a WARF of 1834), a weighted average
recovery rate upon default of 50.50%, a diversity
score of 19 and a weighted average spread of 2.38%.
Moody's incorporates the default and recovery properties of the
collateral pool in cash flow model analysis where they are subject to
stresses as a function of the target rating on each CLO liability reviewed.
Moody's derives the default probability from the credit quality
of the collateral pool and Moody's expectation of the remaining
life of the collateral pool. The average recovery rate for future
defaults is based primarily on the seniority of the assets in the collateral
pool. In addition, Moody's assessed alternative recovery
prospects for CLO securities. Although these alternative recovery
assumptions are generally derived from those presented in Moody's
methodology for rating Structured Finance CDO they may vary based on the
specifics of the analysis of the transaction. In each case,
historical and market performance and the collateral manager's latitude
for trading the collateral are also factors.
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 this transaction
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.
Ye Zhang
Associate 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
Min Xu
VP - Sr Credit Officer/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 USD 26 million of CLO notes issued by Kingsland I, Ltd.
