USD $329 million of debt securities affected
New York, April 15, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by 505 CLO I Ltd.:
U.S.$562,000,000 Class A Senior Notes
Due 2015 (current balance of $219,232,526.6),
Upgraded to Aaa (sf); previously on August 26, 2010 Upgraded
to Aa2 (sf);
U.S.$67,000,000 Class B Deferrable Mezzanine
Notes Due 2015, Upgraded to A1 (sf); previously on August 26,
2010 Upgraded to Baa2 (sf);
U.S.$23,000,000 Class C Deferrable Mezzanine
Notes due 2015, Upgraded to Baa1 (sf); previously on August
26, 2010 Upgraded to Ba3 (sf);
U.S.$18,000,000 Class D Deferrable Junior
Notes due 2015 (current balance of $20,060,110),
Upgraded to B1 (sf); previously on September 3, 2009 Downgraded
to Caa3 (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class A notes, which have been
paid down by approximately 37% or $126 million since the
rating action in August 2010. As a result of the delevering,
the overcollateralization ratios have increased since the rating action
in August 2010. As of the latest trustee report dated March 3,
2011, the Class A, Class B, Class C and Class D overcollateralization
ratios are reported at 190.78%, 146.1%,
135.23%, and 127.79% respectively,
versus August 2010 levels of 154.9%, 129.7%,
122.9%, and 118.01% respectively.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the last rating action. Based
on the March 2011 trustee report, the weighted average rating factor
is 3226 compared to 3485 in August 2010, and securities rated Caa1
or lower make up approximately 13.8% of the underlying portfolio
versus 21% in August 2010.
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 and principal proceeds of $415.6
million, defaulted par of $13.7 million, weighted
average default probability of 30.50% (implying a WARF of
4968), a weighted average recovery rate upon default of 44.61%,
and a diversity score of 26. 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.
505 CLO I Ltd., issued in September of 2008, 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 "Updated Approach to the Usage of Credit Estimates in Rated
Transactions" published in October 2009.
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
six months.
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 2.3.2.1 of the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default
probability stresses by assuming an equivalent of Caa3 for CEs that were
not updated within the last 15 months, a 1.5 notch-equivalent
assumed downgrade for CEs last updated between 12-15 months ago,
and a 0.5 notch-equivalent assumed downgrade for CEs last
updated between 6-12 months ago. 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) in lieu of the aforementioned stresses. Notwithstanding the
foregoing, in all cases the lowest assumed rating equivalent is
Caa3.
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, whereby
a positive difference corresponds to lower expected losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF --20% (3974)
Class A: 0
Class B: +2
Class C: +1
Class D: +3
Moody's Adjusted WARF +20% (5961)
Class A: 0
Class B: -2
Class C: -2
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 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 managers' investment strategies and behavior and 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) Delevering: The main source of uncertainty in this transaction
is whether delevering from unscheduled principal proceeds will continue
and at what pace. Delevering 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) 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 deals' 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) 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. 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.
REGULATORY DISCLOSURES
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 information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation 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.
New York
Raina Patel
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Min Xu
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
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.
