USD $299 million of debt securities affected
New York, January 24, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Hewett's Island CLO II, Ltd.:
U.S. $255,000,000 Class A-1 Senior
Secured Notes Due December 2016 (current outstanding balance of $242,934,739),
Upgraded to A1 (sf); previously on November 23, 2010,
A2 (sf) Placed Under Review for Possible Upgrade;
U.S. $8,000,000 Class A-2A Floating
Rate Senior Secured Notes Due December 2016, Upgraded to Baa3 (sf);
previously on November 23, 2010, Ba1 (sf) Placed Under Review
for Possible Upgrade;
U.S. $7,000,000 Class A-2B Fixed
Rate Senior Secured Notes Due December 2016, Upgraded to Baa3 (sf);
previously on November 23, 2010, Ba1 (sf) Placed Under Review
for Possible Upgrade;
U.S. $2,500,000 Class B-1A Floating
Rate Deferrable Amortizing Senior Secured Notes Due December 2016 (current
outstanding balance of $583,333), Upgraded to Ba1 (sf);
previously on November 23, 2010, B1 (sf) Placed Under Review
for Possible Upgrade;
U.S. $7,500,000 Class B-1B Fixed
Rate Deferrable Amortizing Senior Secured Notes Due December 2016 (current
outstanding balance of $1,750,000), Upgraded
to Ba1 (sf); previously on November 23, 2010, B1 (sf)
Placed Under Review for Possible Upgrade;
U.S. $11,000,000 Class B-2 Deferrable
Senior Secured Notes Due December 2016, Upgraded to Ba3 (sf);
previously on November 23, 2010, Caa1 (sf) Placed Under Review
for Possible Upgrade;
U.S. $11,000,000 Class C Secured Notes
Due December 2016, Upgraded to Caa2; previously on November
23, 2010, Ca (sf) Placed Under Review for Possible Upgrade;
U.S. $12,000,000 Class D Subordinated
Secured Notes Due December 2016 (current outstanding balance of $9,621,329),
Upgraded to Caa3 (sf); previously on November 23, 2010,
C (sf) Placed Under Review for Possible Upgrade;
U.S. $16,000,000 Combination Securities
Due December 2016 (current rated balance of $7,134,554),
Upgraded to Caa3 (sf); previously on July 8, 2009 Downgraded
to C (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 transaction's overcollateralization
ratios since the rating action in July 2009. 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 December 31, 2010, the weighted average rating factor
is currently 2177 compared to 2255 in the June 2009 report, and
securities rated Caa1/CCC+ or lower make up approximately 7.3%
of the underlying portfolio versus 18.7% in June 2009.
Additionally, defaulted securities total about $8.0
million of the underlying portfolio compared to $38.8 million
in June 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in July 2009. The Senior, Class B-2,
Class C and Class D overcollateralization ratios are reported at 115.0%,
110.3%, 106.0% and 102.5%,
respectively, versus June 2009 levels of 107.4%,
103.2%, 99.2% and 95.9%,
respectively, and all related overcollateralization tests are currently
in compliance. In particular, the Class D overcollateralization
ratio has increased, in part, due to the diversion of excess
interest to delever the Class D notes. Since the rating action
in July 2009, the Class D Notes have been paid down by approximately
7.2% or $0.75 million. Moody's
also notes that the Class C and 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 balance
of $293.3 million, defaulted par of $11.1
million, a weighted average default probability of 20.1%
(implying a WARF of 3322), a weighted average recovery rate upon
default of 43.3%, and a diversity score of 51.
These default and recovery properties of the collateral pool are incorporated
in Moody's 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.
Hewett's Island CLO II, Ltd., issued in December 2004,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in assigning these ratings was "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.
Other methodologies and factors that may have been considered in the process
of rating the notes issued by this issuer can also be found on Moody's
website.
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% (2658)
Class A-1: +2
Class A-2A: +3
Class A-2B: +3
Class B-1A: +2
Class B-1B: +2
Class B-2: +2
Class C: +3
Class D: +1
Combination Securities: +2
Moody's Adjusted WARF + 20% (3986)
Class A-1: -2
Class A-2A: -1
Class A-2B: -1
Class B-1A: -1
Class B-1B: -1
Class B-2: -2
Class C: -2
Class D: 0
Combination Securities: 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
equal:
Moody's Adjusted WARR + 2% (45.3%)
Class A-1: 0
Class A-2A: +1
Class A-2B: +1
Class B-1A: +1
Class B-1B: +1
Class B-2: 0
Class C: +1
Class D: 0
Combination Securities: 0
Moody's Adjusted WARR - 2% (41.3%)
Class A-1: 0
Class A-2A: 0
Class A-2B: 0
Class B-1A: 0
Class B-1B: 0
Class B-2: -1
Class C: -1
Class D: 0
Combination Securities: 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) 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.
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.
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
Hongfei Zhang
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Danielle Nazarian
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 Hewett's Island CLO II, Ltd.
