USD $283 million of debt securities affected
New York, February 15, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Clydesdale CLO 2004, Ltd.:
U.S. $ 255,000,000 Class A-1 Floating
Rate Notes Due 2016 (current balance of $217,408,421),
Upgraded to Aaa (sf); previously on July 17, 2009 Downgraded
to Aa2 (sf);
U.S. $ 22,500,000 Class A-2 Floating
Rate Notes Due 2016, Upgraded to A1 (sf); previously on July
17, 2009 Downgraded to A3 (sf);
U.S. $13,250,000 Class B-1 Deferrable
Floating Rate Notes Due 2016, Upgraded to Baa2 (sf); previously
on July 17, 2009 Downgraded to Ba2 (sf);
U.S. $5,750,000 Class B-2 Deferrable
Fixed Rate Notes Due 2016, Upgraded to Baa2 (sf); previously
on July 17, 2009 Downgraded to Ba2 (sf);
U.S. $11,500,000 Class C-1 Floating
Rate Notes Due 2016, Upgraded to B1 (sf); previously on November
23, 2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
U.S. $2,500,000 Class C-2 Fixed
Rate Notes Due 2016, Upgraded to B1 (sf); previously on November
23, 2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
U.S. $10,000,000 Class D Floating Rate
Notes Due 2016, 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 of the notes 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). In particular, as of the latest trustee report dated
January 7, 2011, the weighted average rating factor is currently
2620 compared to 2721 in the June 15, 2009 report. Additionally,
defaulted securities total about $6.9million (2%
of total par) of the underlying portfolio compared to $28.3million
(8% of total par) in June 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action. The Class A, B, C and D Overcollateralization
Tests are reported at 120.17%, 112.47%,
107.40% and 104.04% respectively, versus
June 2009 levels of 118.05%, 110.49%,
105.51% and 102.22% respectively. All
overcollateralization tests are currently in compliance. Moody's
expects deleveraging to continue as a result of the end of the reinvestment
period in October 2010. On the last Distribution Date as of January
18, 2011, the Class A1 notes were paid down by $37.6
million or about 15% since the rating action in July 2009.
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 balance of $294 million, defaulted
par of $7.8 million, a weighted average default probability
of 23.44% (implying a WARF of 3524), a weighted average
recovery rate upon default of 43.87% and a diversity score
of 69. 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.
Clydesdale CLO 2004, Ltd., issued in August 2004,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in these ratings was "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 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 modelled 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 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% (2819)
Class A1: 0
Class A2: +3
Class B1: +3
Class B2: +3
Class C1: +2
Class C2: +2
Class D: +2
Moody's Adjusted WARF +20% (4229)
Class A1: -1
Class A2: -1
Class B1: -1
Class B2: -1
Class C1: -1
Class C2: -1
Class D: -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 manager's investment strategy and behaviour 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) 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) 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 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.
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
Yasmine Mahdavi
Asst Vice President - 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 Clydesdale CLO 2004, Ltd.
