USD $89 million of original debt securities affected
New York, March 15, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Galaxy III CLO, Ltd.:
US$40,833,000 Class B Floating Rate Notes Due 2016,
Upgraded to Aaa (sf); previously on May 17, 2010 Upgraded to
Aa1 (sf);
US$7,750,000 Class E-1Deferrable Floating Rate
Notes Due 2016 (current balance of $7,075,451),
Upgraded to Caa3 (sf); previously on Nov 23, 2010 Ca (sf) Placed
Under Review for Possible Upgrade;
US$15,500,000 Class E-2 Deferrable Fixed Rate
Notes Due 2016 (current balance of $14,150,901),
Upgraded to Caa3 (sf); previously on Nov 23, 2010 Ca (sf) Placed
Under Review for Possible Upgrade;
US$4,750,000 Class E-3 Deferrable Fixed Rate
Notes Due 2016 (current balance of $4,336,567),
Upgraded to Caa3 (sf); previously on Nov 23, 2010 Ca (sf) Placed
Under Review for Possible Upgrade;
US$20,500,000 Combination Securities Due 2016 (current
rated balance of $13,680,542), Upgraded to Caa1
(sf); previously on May 17, 2010 Upgraded to Caa3 (sf).
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class A Notes, which have been
paid down by approximately 10.2% or $21.7
million since the rating action in May 2010. As a result of the
delevering, the overcollateralization ratios have increased since
the rating action in May 2010. As of the latest trustee report
dated February 7, 2011, the Class C, Class D and Class
E overcollateralization ratios are reported at 120.44%,
112.63% and 103.13%, respectively,
versus April 2010 levels of 119.00%, 111.43%
and 102.19%, respectively and all related overcollateralization
tests are currently in compliance.
Moody's also notes that the deal has benefited from improvement in the
credit quality of the underlying portfolio since the rating action in
May 2010. Based on the February 2011 trustee report, the
weighted average rating factor is 2405 compared to 2506 in April 2010.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to about $1
million from approximately $8 million in April 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 $304 million, defaulted par of $3 million,
a weighted average default probability of 18.02% (implying
a WARF of 3145), a weighted average recovery rate upon default of
42.71%, and a diversity score of 62. 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.
Galaxy III CLO, Ltd., issued in August 2004,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodologies used in this rating 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 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% (2516)
Class A1: 0
Class A2: 0
Class B: 0
Class C: +3
Class D: +2
Class E1: +1
Class E2: +1
Class E3: +1
Combo: +2
Moody's Adjusted WARF + 20% (3774)
Class A1: 0
Class A2: 0
Class B: -2
Class C: -1
Class D: -1
Class E1: -1
Class E2: -1
Class E3: -1
Combo: -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 manager's investment strategy 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 the
recent U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
Sources of additional performance uncertainties are described below:
Delevering: The main source of uncertainty in this transaction relates
to the extent to which the manager will elect to use unscheduled principal
proceeds to reinvest into substitute collateral in lieu of delevering
the rated notes after the end of the reinvestment period. Delevering
may also accelerate due to high prepayment levels in the loan market and/or
collateral sales by the manager, which may have a significant impact
on the notes' ratings.
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
Karie Chen
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 Galaxy III CLO, Ltd.
