USD $344 million of debt securities affected
New York, April 15, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Franklin CLO VI, Ltd.:
U.S. $272,000,000 Class A Senior Secured
Floating Rate Notes (current outstanding balance of $261,594,841)
Due 2019, Upgraded to Aa1 (sf); previously on October 29,
2010 Upgraded to Aa2 (sf);
U.S. $38,000,000 Class B Senior Secured
Floating Rate Notes Due 2019, Upgraded to A3 (sf); previously
on October 29, 2010 Upgraded to Baa1 (sf);
U.S. $18,000,000 Class C Senior Secured
Deferrable Floating Rate Notes Due 2019, Upgraded to Baa3 (sf);
previously on October 29, 2010 Upgraded to Ba2 (sf);
U.S. $15,000,000 Class D Senior Secured
Deferrable Floating Rate Notes Due 2019, Upgraded to B1 (sf);
previously on October 29, 2010 Upgraded to B3 (sf);
U.S. $11,500,000 Class E Senior Secured
Deferrable Floating Rate Notes (current outstanding balance of $
11,035,647) Due 2019, Upgraded to Caa1 (sf); previously
on October 29, 2010 Upgraded to Caa3 (sf).
According to Moody's, the rating actions taken on the notes
result primarily from an increase in the overcollateralization ratios
of the notes since the last rating action in October 2010.
The overcollateralization ratios of the rated notes have increased since
the rating action in October 2010 and are currently all in compliance.
The Class A/B, Class C, Class D and Class E overcollateralization
ratios are reported at 120.17%, 113.36%,
108.25%, and 104.77%, respectively,
versus September 2010 levels of 117.75%, 111.08%,
106.07%, and 102.59%, respectively.
Moody's also notes that the Class E Notes received a small principal
repayment in the amount of $263,852 or 2.3%
of the outstanding balance on the payment date in November 2010 due to
the failure of the Interest Reinvestment Test.
The credit quality of the underlying portfolio has been relatively stable
since the last rating action in October 2010. In particular,
as of the latest trustee report dated March 25, 2011, the
weighted average rating factor is currently 2522 compared to 2542 in the
September 2010 report, and securities rated Caa1/CCC+ or lower
make up approximately 6.2% of the underlying portfolio versus
7.9% in September 2010. Additionally, defaulted
securities total about $8.7 million of the underlying portfolio
compared to $8.9 million in September 2010.
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 $352.3 million, defaulted par of $12.5
million, weighted average default probability of 29.97%
(implying a WARF of 3740), a weighted average recovery rate upon
default of 44.66%, and a diversity score of 55.
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.
Franklin CLO VI, Ltd., issued in July 2007, is
a collateralized loan obligation backed primarily by a portfolio of senior
The principal methodology used in assigning the ratings of the notes 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
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 22.214.171.124 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
Moody's Adjusted WARF -- 20% (2992)
Class A: +1
Class B: +2
Class C: +2
Class D: +2
Class E: +3
Moody's Adjusted WARF + 20% (4488)
Class A: -2
Class B: -2
Class C: -2
Class D: -2
Class E: -2
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 deals' 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. However,
as part of the base case, Moody's considered spread 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.
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.
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of notes issued by Franklin CLO VI, Ltd.
250 Greenwich Street
New York, NY 10007