USD $245 million of debt securities affected
New York, October 01, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Canaras Summit CLO Ltd.:
U.S.$148,500,000 Class A-1 Floating
Rate Senior Secured Notes Due 2021 (current outstanding balance of $144,015,800),
Upgraded to Aa2 (sf); previously on June 25, 2009 Downgraded
to Aa3 (sf);
U.S.$75,000,000 Class A-2 Floating
Rate Delayed Funding Senior Secured Notes Due 2021 (current outstanding
balance of $72,735,252), Upgraded to Aa2 (sf);
previously on June 25, 2009 Downgraded to Aa3 (sf);
U.S.$18,000,000 Class B Floating Rate
Subordinate Secured Notes Due 2021, Upgraded to A3 (sf); previously
on June 25, 2009 Downgraded to Baa1 (sf);
U.S.$10,500,000 Class E Floating Rate
Junior Subordinate Secured Deferrable Notes Due 2021, Upgraded to
Caa3 (sf); previously on June 25, 2009 Downgraded to Ca (sf).
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 last rating action in June 2009. In Moody's view,
these positive developments coincide with reinvestment of sale proceeds
(including higher than previously anticipated recoveries realized on defaulted
securities) into substitute assets with higher par amounts and/or higher
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 September 2010 trustee report,
the weighted average rating factor is 2649 compared to 3054 in May 2009,
and securities rated Caa1 and below make up approximately 5% of
the underlying portfolio versus 8% in May 2009. Moody's
adjusted WARF has also declined since the last rating action 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 $0 from approximately
$22 million in May 2009.
The overcollateralization ratios of the rated notes have also increased
since the last rating action as a result of paydowns of senior notes due
to overcollateralization ratio failures and higher than expected recoveries
on defaulted securities. The Class A/B, Class C, Class
D and Class E overcollateralization ratios are reported at 121.56%,
113.35%, 109.02%, and 104.81%,
respectively, versus May 2009 levels of 114.79%,
107.18%, 103.15%, and 99.18%,
respectively, and all related overcollateralization tests are currently
in compliance. Moody's also notes that the Class 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 $284
million, defaulted par of $0.9 million, weighted
average default probability of 28.4% (implying a WARF of
3570), a weighted average recovery rate upon default of 44.3%,
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.
Canaras Summit CLO Ltd., issued in June 27, 2007,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in rating Canaras Summit CLO Ltd.
was "Moody's Approach to Rating Collateralized Loan Obligations"
rating methodology 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
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 18.104.22.168 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% (2856)
Class A1: +2
Class A2: +2
Class B: +2
Class C: +2
Class D: +2
Class E: +4
Moody's Adjusted WARF + 20% (4284)
Class A1: -1
Class A2: -1
Class B: -2
Class C: -1
Class D: -1
Class E: -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 losses), assuming that all other factors are held
Moody's Adjusted WARR + 2% (46.3%)
Class A1: +1
Class A2: +1
Class B: 0
Class C: +1
Class D: +1
Class E: +1
Moody's Adjusted WARR - 2% (42.3%)
Class A1: 0
Class A2: 0
Class B: -1
Class C: 0
Class D: 0
Class E: 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) 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.
2) 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 and diversity score. With respect
to the weighted average spread, we analyzed the impact assuming
a mid-point between the reported and the covenanted value to give
some credit to the deal's higher weighted average spread.
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.
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.
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.
Structured Finance Group
Moody's Investors Service
Ramon O. Torres
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of notes issued by Canaras Summit CLO Ltd.
250 Greenwich Street
New York, NY 10007