USD $69 million of debt securities affected
New York, December 22, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Babson CLO Ltd. 2008-I:
U.S. $18,000,000 Class B Senior Floating
Rate Notes Due 2018, Upgraded to A3 (sf); previously on Jun
16, 2009 Downgraded to Baa1 (sf);
U.S. $16,000,000 Class C-1 Deferrable
Mezzanine Floating Rate Notes Due 2018, Upgraded to Baa3 (sf);
previously on Jun 16, 2009 Confirmed at Ba1 (sf);
U.S. $5,000,000 Class C-2 Deferrable
Mezzanine Fixed Rate Notes Due 2018, Upgraded to Baa3 (sf);
previously on Jun 16, 2009 Confirmed at Ba1 (sf);
U.S. $13,000,000 Class D Deferrable Mezzanine
Floating Rate Notes Due 2018, Upgraded to Ba3 (sf); previously
on Jun 16, 2009 Downgraded to B2 (sf);
U.S. $16,500,000 Class E Deferrable Mezzanine
Floating Rate Notes Due 2018, Upgraded to Caa2 (sf); previously
on Nov 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 of the notes since
the rating action in June 2009. In Moody's view, these positive
developments coincide with reinvestment of sale proceeds and prepayments
(including higher than previously anticipated recoveries realized on defaulted
securities) into substitute assets with higher par amounts and/or higher
ratings.
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. In particular, as of the latest trustee report
dated November 10, 2010, the weighted average rating factor
is currently 2743 compared to 2921 in the May 2009 report, and securities
rated Caa1 or lower make up approximately 10.0% of the underlying
portfolio versus 11.8% in May 2009. Additionally,
defaulted securities total about $10 million of the underlying
portfolio compared to $40 million in May 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in June 2009. The Class A/B, Class
C, Class D, and Class E overcollateralization ratios are reported
at 125.69%, 118.42%, 114.32%
and 109.51%, respectively, versus May 2009 levels
of 116.69%, 110.16%, 106.42%
and 102.02%, respectively, and all related overcollateralization
tests are currently in compliance. Moody's also notes that the
Class D and E Notes are no longer deferring interest and that all previously
deferred interest has been paid in full.
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 $430 million,
defaulted par of $10 million, weighted average default probability
of 29.15% (implying a WARF of 3703), a weighted average
recovery rate upon default of 44.19%, and a diversity
score of 63. 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.
Babson CLO LTD. 2008-I, issued in June 2008,
is a collateralized loan obligation backed primarily by senior secured
loans.
The principal methodology used in this rating was the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009.
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 loss), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2962)
Class A: +2
Class B: +3
Class C-1: +3
Class C-2: +3
Class D: +2
Class E: +4
Moody's Adjusted WARF + 20% (4444)
Class A: -2
Class B: -2
Class C-1: -1
Class C-2: -1
Class D: -2
Class E: -3
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% (46.19%)
Class A: +1
Class B: +1
Class C-1: +1
Class C-2: +1
Class D: 0
Class E: +2
Moody's Adjusted WARR - 2% (42.19%)
Class A: 0
Class B: 0
Class C-1: 0
Class C-2: 0
Class D: -1
Class E: -1
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) 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 deal's 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.
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.
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
Shana Sethi
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 Babson CLO Ltd. 2008-I
