USD $371 million of debt securities affected
New York, December 20, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Halcyon Loan Investors CLO II,
U.S.$270,500,000 Class A-1-S
Senior Secured Floating Rate Notes due 2021 (current outstanding balance
of $262,051,683), Upgraded to Aa1 (sf);
previously on May 13, 2010 Upgraded to Aa3 (sf);
U.S.$30,250,000 Class A-1-J
Senior Secured Floating Rate Notes due 2021, Upgraded to A2 (sf);
previously on May 13, 2010 Upgraded to A3 (sf);
U.S.$23,000,000 Class A-2 Senior
Secured Floating Rate Notes due 2021, Upgraded to Baa2 (sf);
previously on May 13, 2010 Upgraded to Baa3 (sf);
U.S.$18,500,000 Class B Senior Secured
Deferrable Floating Rate Notes due 2021, Upgraded to Ba1 (sf);
previously on May 13, 2010 Upgraded to Ba3 (sf);
U.S.$21,750,000 Class C Senior Secured
Deferrable Floating Rate Notes due 2021,Upgraded to B2 (sf);
previously on May 13, 2010 Upgraded to B3 (sf);
U.S.$15,500,000 Class D Secured Deferrable
Floating Rate Notes due 2021,Upgraded to Caa3 (sf); previously
on November 23, 2010 Ca (sf) Placed Under Review for Possible Upgrade.
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 May 2010. In Moody's view, these
positive developments coincide with reinvestment of sale proceeds (including
higher than previously anticipated recoveries realized on defaulted securities)
into substitute assets with higher par amounts and/or higher ratings.
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 12, 2010, the weighted average rating factor
is currently 2944 compared to 3063 in the April 2010 report, and
securities rated Caa1or lower make up approximately 13.2%
of the underlying portfolio versus15.4%% in April
2010. Moody's adjusted WARF has declined since the rating
action in May 2010 due to a decrease in the percentage of securities with
ratings on "Review for Possible Downgrade" or with a "Negative Outlook."
In addition, there are currently no defaulted securities based on
the November 2010 trustee report, compared to $9.2
million in April 2010.
The overcollateralization ratios of the rated notes have also improved
since the rating action in May 2010. The Class A, Class B,
Class C and Class D overcollateralization ratios are reported at 124.1%,
117.2%, 110.0% and 105.4%
respectively, versus April 2010 levels of 120.8%,
114.1%, 107.1% and 102.6%,
respectively, and all related overcollateralization tests are currently
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 $384.3
million, defaulted par of $10.8 million, weighted
average default probability of 26.3% (implying a WARF of
3907), a weighted average recovery rate upon default of 42.03%,
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.
Halcyon Loan Investors CLO II, Ltd, issued in April 2007,
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
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 126.96.36.199 of the "Moody's Approach
to Rating Collateralized Loan Obligations" rating methodology published
in August 2009. In addition, due to the low diversity of
the collateral pool, CDOROM 2.6 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's stressed the default probabilities
by applying a 1.5 notch-equivalent assumed downgrade for
CEs last updated between 12-15 months ago, and a 0.5
notch-equivalent assumed downgrade for CEs last updated between
6-12 months ago.
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% (3126)
Class A-1-S: +1
Class A-1-J: +2
Class A-2: +3
Class B: +2
Class C: +2
Moody's Adjusted WARF + 20% (4688)
Class A-1-S: -2
Class A-1-J: -2
Class A-2: -2
Class B: -2
Class C: -3
Class D: 0
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% (44.03%)
Class A-1-S: 0
Class A-1-J: 0
Class A-2: +1
Class B: 0
Class C: +1
Moody's Adjusted WARR - 2% (40.03%)
Class A-1-S: 0
Class A-1-J: -1
Class A-2: 0
Class B: -1
Class C: 0
Class D: 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.
Sources of additional performance uncertainties are described below:
1) Recovery of Moody's assumed defaulted assets: Market value
fluctuations in assets which were assumed to be defaulted by Moody's
may create volatility in the deal's overcollateralization levels.
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.
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.
Structured Finance Group
Moody's Investors Service
Ramon O. Torres
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of notes issued by Halcyon Loan Investors CLO II, Ltd.
250 Greenwich Street
New York, NY 10007