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Rating Action:

Moody's upgrades the ratings of USD 72 million of notes issued by KKR Financial CLO 2005-1 Ltd.

Global Credit Research - 17 Jan 2014

Moody's also affirms the ratings of USD 196 million of notes

New York, January 17, 2014 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by KKR Financial CLO 2005-1 Ltd.:

U.S. $ 64,000,000 Class D Deferrable Mezzanine Floating Rate Notes, Due 2017, Upgraded to Aa1 (sf); previously on July 29, 2013 Upgraded to Aa3 (sf)

U.S. $ 15,000,000 Class E Deferrable Mezzanine Floating Rate Notes, Due 2017, Upgraded to A1 (sf); previously on July 29, 2013 Upgraded to A3 (sf)

U.S. $ 5,000,000 Class F Deferrable Mezzanine Floating Rate Notes, Due 2017 , Upgraded to A3 (sf); previously on July 29, 2013 Upgraded to Baa2 (sf)

Moody's also affirmed the ratings of the following notes

U.S. $ 615,000,000 Class A-1 Senior Secured Floating Rate Notes, Due 2017, Affirmed Aaa (sf); previously on July 29, 2013 Affirmed Aaa (sf)

U.S. $ 58,000,000 Class B Senior Secured Floating Rate Notes, Due 2017, Affirmed Aaa (sf); previously on July 29, 2013 Affirmed Aaa (sf)

U.S. $ 64,000,000 Class C Deferrable Mezzanine Secured Floating Rate Notes, Due 2017, Affirmed Aaa (sf); previously on July 29, 2013 Affirmed Aaa (sf)

KKR Financial CLO 2005-1 Ltd., issued in March 2005, is a collateralized loan obligation backed primarily by a portfolio of senior secured loans and CLO securities. The portfolio is managed by KKR Financial Corporation. The transaction's reinvestment period ended in April 2011.

RATINGS RATIONALE

According to Moody's, the rating actions taken on the notes are primarily a result of deleveraging of the senior notes and an increase in the transaction's overcollateralization ratios since the rating action in July 2013. Moody's notes that the Class A-1 notes have been paid down by approximately 46% or $64 million since the last rating action. Based on the latest trustee report dated December 16, 2013, the Senior, Class C/D and Class E overcollateralization ratios are reported at 276.5%, 147.0%, and 138.7%, respectively, versus June 2013 levels of 216.5%, 136.0%, and 129.7%, respectively.

The portfolio includes a number of investments in securities that mature after the notes do. Based on the trustee's December 2013 report, securities that mature after the notes do currently make up approximately 37.5% of the portfolio. These investments could expose the notes to market risk in the event of liquidation when the notes mature.

Methodology Underlying the Rating Action

The principal methodology used in this rating was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in November 2013. 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

Moody's notes that 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: CLO performance may be negatively impacted by a) uncertainties of credit conditions in the general economy and b) the large concentration of upcoming speculative-grade debt maturities which may create challenges for issuers to refinance.

2) Collateral Manager: Performance may also be impacted, either positively or negatively, by a) the manager's investment strategy and behavior and b) divergence in legal interpretation of CLO documentation by different transactional parties due to embedded ambiguities.

3) Collateral credit risk: A shift towards holding collateral of better credit quality, or better than expected credit performance of the underlying assets collateralizing the transaction, can lead to positive CLO performance. Conversely, a negative shift in credit quality or performance of the underlying collateral can have adverse consequences for CLO performance.

4) 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 transaction'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.

5) 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 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. Faster than expected note repayment will usually have a positive impact on CLO notes, beginning with those having the highest payment priority.

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. 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.

In addition to the base case analysis, 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% (2208)

Class A-1: 0

Class B: 0

Class C: 0

Class D: +1

Class E: +2

Class F: +2

Moody's Adjusted WARF + 20% (3312)

Class A-1: 0

Class B: 0

Class C: 0

Class D: -1

Class E: -2

Class F: -1

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" rating methodology published in November 2013.

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 be different from the trustee's reported numbers. In its base case, Moody's analyzed the underlying collateral pool as having a performing par and principal proceeds balance of $338.5 million, defaulted par of $51.7 million, a weighted average default probability of 15.96% (implying a WARF of 2760), a weighted average recovery rate upon default of 50.7%, a diversity score of 13 and a weighted average spread of 3.5%.

The 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.

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.

Shan Lai
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 USD 72 million of notes issued by KKR Financial CLO 2005-1 Ltd.
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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