USD $394 million of debt securities affected
New York, January 31, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Avenue CLO II, Ltd.:
U.S.$320,000,000 Class A-1L Floating
Rate Notes due 2017 (current outstanding balance of $298,326,009),
Upgraded to Aa1 (sf); previously on July 15, 2009 Downgraded
to Aa2 (sf);
U.S.$35,500,000 Class A-2L Floating
Rate Notes due 2017, Upgraded to A2 (sf); previously on July
15, 2009 Downgraded to A3 (sf);
U.S.$22,500,000 Class A-3L Floating
Rate Notes due 2017, Upgraded to Baa3 (sf); previously on July
15, 2009 Confirmed at Ba1 (sf);
U.S.$19,250,000 Class B-1L Floating
Rate Notes due 2017, Upgraded to Ba3 (sf); previously on Jul
15, 2009 Confirmed at B1 (sf);
U.S.$19,000,000 Class B-2L Floating
Rate Notes due 2017 (current outstanding balance of $18,032,863),
Upgraded to Caa3 (sf); previously on November 23, 2010 Ca (sf)
Placed Under Review for Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from improvement in the credit quality of the underlying portfolio
and an increase in the overcollateralization ratios since the rating action
in July 2009.
Improvement in the credit quality is observed through an improvement in
the average credit rating (as measured by the weighted average rating
factor) and a decrease in the proportion of securities from issuers rated
Caa1 and below. Based on the December 2010 trustee report,
the weighted average rating factor is 2433 compared to 2653 in May 2009,
and securities rated Caa1 and below make up approximately 5.3%
of the underlying portfolio versus 10% in May 2009. Moody's
adjusted WARF has also declined since the rating action in July 2009 due
to a decrease in the percentage of securities with ratings on "Review
for Possible Downgrade" or with a "Negative Outlook." The deal
also experienced a decrease in defaults. In particular, the
dollar amount of defaulted securities has decreased to approximately $18
million from $41 million in May 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in July 2009. Based on the December 2010
trustee report, the Senior Class A, Class A, Class B-1L,
and Class B-2L overcollateralization ratios are reported at 121.7%,
114.0%, 108.2%, and 103.2%,
respectively, versus May 2009 levels of 117.5%,
110.4%, 104.9%, and 98.8%,
respectively, and all related overcollateralization tests,
except the interest diversion test, are currently in compliance.
The Class A-1L Notes have amortized by approximately $17.4mm
or 5.5% from principal and interest proceeds since the rating
action in July 2009 due to failure of the overcollateralization tests.
The deal is scheduled to end the reinvestment period in October 2011.
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 balance of $402
million, defaulted par of $18.3 million, weighted
average default probability of 23.7% (implying a WARF of
3405), a weighted average recovery rate upon default of 42.8%,
and a diversity score of 55. 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.
Avenue CLO II, issued on August 11, 2005, 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 August 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
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.
In addition to the base case analysis described above, Moody's also
performed a number of sensitivity analyses to test the impact on all rated
notes, including the following:
1. Various default probabilities to capture potential defaults
in the underlying portfolio.
2. A range of recovery rate assumptions for all assets to capture
variability in recovery rates.
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 losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF - 20% (2724)
Class A-1L: +1
Class A-2L: +3
Class A-3L: +2
Class B-1L: +2
Class B-2L: +1
Moody's Adjusted WARF + 20% (4086)
Class A-1L: -1
Class A-2L: -1
Class A-3L: -2
Class B-1L: -1
Class B-2L: -2
Below is a summary of the impact of different recovery rate 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 WARR + 2% (44.8%)
Class A-1L: +1
Class A-2L: +1
Class A-3L: 0
Class B-1L: +1
Class B-2L: +1
Moody's Adjusted WARR - 2% (40.8%)
Class A-1L: 0
Class A-2L: 0
Class A-3L: -1
Class B-1L: 0
Class B-2L: 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 strategy 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) 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 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.
2) Weighted average life: The notes' ratings are sensitive
to the weighted average life assumption of the portfolio, which
may be extended due to the manager's decision to reinvest into new
issue loans or other loans with longer maturities and/or participate in
amend-to-extend offerings. Moody's tested for
a possible extension of the actual weighted average life in its analysis.
3) Other collateral quality metrics: The deal is allowed to reinvest
and the manager has the ability to deteriorate the collateral quality
metrics' existing cushions against the covenant levels. Moody's
analyzed the impact of assuming lower of reported and covenanted values
for weighted average rating factor, weighted average spread,
weighted average coupon, and diversity score. However,
as part of the base case, Moody's considered a weighted average
spread level higher than the covenant level due to large differences between
the reported and covenant levels.
4) 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.
5) 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.
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
Aniket Deshpande
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Ramon O. Torres
Senior Vice President
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 Avenue CLO II, Ltd.
