USD $92 million of debt securities affected
New York, December 05, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Dryden-XI Leveraged Loan CDO 2006:
U.S. $25,000,000 Class A-2B First
Priority Senior Secured Floating Rate Notes due April 12, 2020,
Upgraded to Aa3 (sf); previously on June 22, 2009, Downgraded
to A1 (sf);
U.S. $47,200,000 Class B Third Priority
Mezzanine Secured Deferrable Floating Rate Notes due April 12, 2020,
Upgraded to Baa3 (sf); previously on June 22, 2009 Confirmed
at Ba1 (sf);
U.S. $23,600,000 Class D Fifth Priority
Mezzanine Secured Deferrable Floating Rate Notes due April 12, 2020
(current outstanding balance of $20,143,416),
Upgraded to Caa3 (sf); previously on November 23, 2010 Ca (sf),
Placed Under Review for Possible Upgrade.
In addition, the Class Q-1 Securities were previously exchanged
for their underlying components at the noteholder's request.
U.S. $10,000,000 Class Q-1 Securities
due April 12, 2020, Withdrawn; previously on June 22,
2009 Downgraded to Ca (sf).
As a result, the rating of the notes has been withdrawn.
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
and prepayments into substitute assets with higher par amounts and/or
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 5, 2010, the weighted average rating factor
is currently 2386 compared to 2680 in the May 2009 report, and securities
rated Caa1 or lower make up approximately 5.9% of the underlying
portfolio versus 11.4% in May 2009. Additionally,
defaulted securities total about $13 million of the underlying
portfolio compared to $55 million in May 2009.
The overcollateralization ratios of the rated notes have also improved
since the last rating action. The Class A, Class B,
Class C, and Class D overcollateralization ratios are reported at
124.13%, 114.86%, 108.43%
and 105.27%, respectively, versus May 2009 levels
of 115.59%, 107.11%, 101.21%
and 97.93%, respectively, and all related overcollateralization
tests are currently in compliance. In particular, the Class
D overcollateralization ratio has increased due to the diversion of excess
interest to delever the Class D notes, including on the January
2010 payment date, when $2.3 million of interest proceeds
reduced the outstanding balance of the Class D Notes by 10%.
Moody's also notes that the Class D 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 $724
million, defaulted par of $14 million, weighted average
default probability of 27.07% (implying a WARF of 3373),
a weighted average recovery rate upon default of 42.18%,
and a diversity score of 65. 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.
Dryden-XI Leveraged Loan CDO 2006, issued in May 2006,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodologies used in this rating were the "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009
and "Using the Structured Note Methodology to Rate CDO Combo-Notes"
rating published in February 2004.
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 184.108.40.206 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% (2698)
Class A-1: +2
Class A-2A: 0
Class A-2B: +3
Class A-3: +2
Class B: +2
Class C-1: +2
Class C-2: +2
Class D: +2
Class Q-2: +3
Moody's Adjusted WARF + 20% (4048)
Class A-1: -1
Class A-2A: -2
Class A-2B: -2
Class A-3: -2
Class B: -2
Class C-1: -3
Class C-2: -3
Class D: -1
Class Q-2: -1
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
Moody's Adjusted WARR + 2% (44.18)
Class A-1: +1
Class A-2A: 0
Class A-2B: +1
Class A-3: 0
Class B: 0
Class C-1: +1
Class C-2: 0
Class D: 0
Class Q-2: +1
Moody's Adjusted WARR - 2% (40.18)
Class A-1: 0
Class A-2A: -1
Class A-2B: 0
Class A-3: -1
Class B: 0
Class C-1: -1
Class C-2: -1
Class D: -1
Class Q-2: 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, 2)
divergence in legal interpretation of CDO documentation by different transactional
parties due to embedded ambiguities, and 3) potential additional
expected loss associated with swap agreements in CDOs as a result of recent
U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
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) 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
3) 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.
4) 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.
5) The deal has a pay-fixed receive-floating interest rate
swap that is currently out of the money. If fixed rate assets prepay
or default, there would be a more substantial mismatch between the
swap notional and the amount of fixed assets, resulting in larger
cash payments to the hedge counterparty. In such cases, payments
to hedge counterparties may consume a large portion or all of the interest
proceeds, leaving the transaction, even with respect to the
senior notes, with poor interest coverage. Payment timing
mismatches between assets and liabilities may cause additional concerns.
If the deal does not receive sufficient projected principal proceeds on
the payment date to supplement the interest proceeds shortfall,
a heightened risk of interest payment default could occur. Similarly,
if principal proceeds are used to pay interest, there may ultimately
be a risk of payment default on the principal of the notes.
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
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of notes issued by Dryden-XI Leveraged Loan CDO 2006
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