USD $319 million of debt securities affected
New York, January 21, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Duane Street CLO 1:
$185,000,000 Class A Senior Floating Rate Notes Due
2017 (current outstanding balance of $179,519,465.52),
Upgraded to Aa1 (sf); previously on September 2, 2009 Downgraded
to Aa2 (sf);
$65,000,000 Class A-2 Senior Delayed Draw Floating
Rate Notes Due 2017 (current outstanding balance of $63,074,406.81),
Upgraded to Aa1 (sf); previously on September 2, 2009 Downgraded
to Aa2 (sf);
$36,000,000 Class B Senior Floating Rate Notes Due
2017, Upgraded to Baa1 (sf); previously on September 2,
2009 Downgraded to Baa2 (sf);
$15,000,000 Class C Deferrable Mezzanine Floating Rate
Notes Due 2017, Upgraded to Ba2 (sf); previously on September
2, 2009 Downgraded to Ba3 (sf);
$15,000,000 Class D Deferrable Mezzanine Floating Rate
Notes Due 2017, Upgraded to Caa1 (sf); previously on November
23, 2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
$7,000,000 Class E Deferrable Junior Floating Rate
Notes Due 2017, Upgraded to Caa3 (sf); previously on November
23, 2010 Ca (sf) Placed Under Review for Possible Upgrade;
$5,000,000 Class Z-2 Combination Notes Due 2017
(current rated balance of $3,364,237.93),
Upgraded to Ba1 (sf); previously on September 2, 2009 Downgraded
to Ba2 (sf).
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 September 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. In particular, as of the latest trustee report
dated December 10, 2010, the weighted average rating factor
is currently 2388 compared to 2578 in the August 2009 report, and
securities rated Caa1/CCC+ or lower make up approximately 3.73%
of the underlying portfolio versus 12.3% in August 2009.
Additionally, defaulted securities total about $2 million
of the underlying portfolio compared to $33.4 million in
August 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in September 2009. The Senior and Mezzanine
overcollateralization ratios are reported at 118.24% and
106.74%, respectively, versus August 2009 levels
of 111.11% and 100.48%, 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 balance
of $330 million, defaulted par of $2 million,
a weighted average default probability of 22.96% (implying
a WARF of 3361), a weighted average recovery rate upon default of
43.45%, and a diversity score of 50. 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.
Duane Street CLO 1, issued in October 2005, is a collateralized
loan obligation backed primarily by a portfolio of senior secured loans.
The principal methodologies used in these ratings were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009
and "Using the Structured Note Methodology to Rate CDO Combo-Notes"
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
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 loss), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2689)
Class A: +1
Class A-2: +1
Class B: +3
Class C: +1
Class D: +4
Class E: +2
Class Z-2: +1
Moody's Adjusted WARF + 20% (4033)
Class A: -2
Class A-2: -2
Class B: -1
Class C: -2
Class D: -1
Class E: -1
Class Z-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
equal:
Moody's Adjusted WARR + 2% (45.45%)
Class A: 0
Class A-2: 0
Class B: +1
Class C: 0
Class D: +1
Class E: +1
Class Z-2: 0
Moody's Adjusted WARR - 2% (41.45)
Class A: -1
Class A-2: -1
Class B: 0
Class C: -1
Class D: 0
Class E: 0
Class Z-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 manager's 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) 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.
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, weighted average spread,
weighted average coupon, and diversity score. However,
as part of the base case, Moody's considered spread and coupon
levels higher than the covenant levels due to the large difference between
the reported and covenant levels.
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
Connie Li
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Jian Hu
MD - Structured Finance
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 Duane Street CLO 1
