USD 45 million of debt securities affected
New York, September 19, 2012 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by 505 CLO I Ltd.:
U.S. $23,000,000 Class C Deferrable Mezzanine
Notes due 2015, Upgraded to Aaa (sf); previously on October
17, 2011 Upgraded to A2 (sf);
U.S.$18,000,000 Class D Deferrable Junior
Notes due 2015 (current balance of 22,136,324), Upgraded
to A2 (sf); previously on October 17, 2011 Upgraded to Baa3
(sf).
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 October 2011. Moody's notes that the Class B Notes
have been paid down by approximately 74.3% or $49.8
million since the last rating action. Based on the latest trustee
report dated September 5, 2012, the Class B, Class C
and Class D overcollateralization ratios are reported at 905.6%,
387.4% and 267.6%, respectively,
versus September 2011 levels of 209.1%, 175.4%
and 155.8%, respectively.
Moody's notes that the deal has benefited from an improvement in the credit
quality of the underlying portfolio since the last rating action in October
2011. Based on the September 2012 trustee report, the weighted
average rating factor is currently 3228 compared to 3401 in September
2011.
However, Moody's also notes that the Class D Interest Coverage
Test is currently failing at 20.9% versus a trigger of 105.0%.
As a result, the Class D Notes are currently deferring interest.
Additionally, the underlying portfolio includes a number of investments
in securities that mature after the maturity date of the notes.
Based on the September 2012 trustee report, securities that mature
after the maturity date of the notes currently make up approximately 21.30%
of the underlying portfolio. These investments potentially expose
the 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" published
in June 2011, 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 balance of $155.8 million, no defaulted par,
a weighted average default probability of 19.81% (implying
a WARF of 3872), a weighted average recovery rate upon default of
53.91%, and a diversity score of 11 based on a portfolio
of 19 obligors. 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.
505 CLO I Ltd., issued in September 2008, is a collateralized
loan obligation backed primarily by a portfolio of senior secured loans.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" published in June 2011.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
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 Approach to Rating Collateralized Loan Obligations"
rating methodology published in June 2011.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default probability
stresses. For each CE where the related exposure constitutes more
than 3% of the collateral pool, Moody's applied a 2-notch
equivalent assumed downgrade (but only on the CEs representing in aggregate
the largest 30% of the pool) as described in Moody's Ratings Implementation
Guidance "Updated Approach to the Usage of Credit Estimates in Rated Transactions",
October 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% (3098)
Class B: 0
Class D: 0
Class D: 0
Moody's Adjusted WARF + 20% (4644)
Class B: 0
Class D: 0
Class D: 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 upcoming
speculative-grade debt maturities which may create challenges for
issuers to refinance. CLO notes' performance may also be
impacted by 1) the manager's investment strategy and behavior and
2) divergence in legal interpretation of CLO documentation by different
transactional parties due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Deleveraging: The main source of uncertainty in this transaction
is whether deleveraging from unscheduled principal proceeds will continue
and at what pace. Deleveraging 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) 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.
3) Exposure to credit estimates: The deal is exposed to a large
number of securities whose default probabilities are assessed through
credit estimates. In the event that Moody's is not provided the
necessary information to update the credit estimates in a timely fashion,
the transaction may be impacted by any default probability stresses Moody's
may assume in lieu of updated credit estimates. Moody's also conducted
stress tests to assess the collateral pool's concentration risk in obligors
bearing a credit estimate that constitute more than 3% of the collateral
pool.
Further information on Moody's analysis of this transaction is available
on www.moodys.com.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant 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 relevant 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 relevant 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.
Information sources used to prepare the rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
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 considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating.
Moody's adopts all necessary measures so that the information it
uses in assigning a 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 the ratings disclosure page on www.moodys.com
for general disclosure on potential conflicts of interests.
Please see the ratings disclosure page on www.moodys.com
for information on (A) MCO's major shareholders (above 5%) and
for (B) further information regarding certain affiliations that may exist
between directors of MCO and rated entities as well as (C) the names of
entities that hold ratings from MIS that have also publicly reported to
the SEC an ownership interest in MCO of more than 5%. A
member of the board of directors of this rated entity may also be a member
of the board of directors of a shareholder of Moody's Corporation;
however, Moody's has not independently verified this matter.
Please see Moody's Rating Symbols and Definitions on the Rating Process
page on www.moodys.com for further information on the meaning
of each rating category and the definition of default and recovery.
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last rating action and the rating history.
The date on which some ratings were first released goes back to a time
before Moody's ratings were fully digitized and accurate data may not
be available. Consequently, Moody's 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 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.
Sange Lama
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
Vice President - Senior Analyst
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 notes issued by 505 CLO I Ltd.
