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Rating Action:

Moody's upgrades the ratings of notes issued by Hewett's Island CLO III, Ltd.

24 Jan 2011

USD $348 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 III, Ltd.:

U.S. $321,500,000 Class A-1 Senior Secured Notes Due August, 2017 (current outstanding balance of $285,598,243), Upgraded to A1 (sf); previously on November 23, 2010, A3 (sf) Placed Under Review for Possible Upgrade;

U.S. $14,800,000 Class A-2 Senior Secured Notes Due August, 2017, Upgraded to Baa2 (sf); previously on November 23, 2010, Ba1 (sf) Placed Under Review for Possible Upgrade;

U.S. $12,700,000 Class B-1 Deferrable Amortizing Senior Secured Notes Due August, 2017 (current outstanding balance of $4,656,673), Upgraded to Baa3 (sf); previously on November 23, 2010, Ba3 (sf) Placed Under Review for Possible Upgrade;

U.S. $14,800,000 Class B-2 Deferrable Senior Secured Notes Due August, 2017, Upgraded to Ba2 (sf); previously on November 23, 2010, B3 (sf) Placed Under Review for Possible Upgrade;

U.S. $14,800,000 Class C Deferrable Secured Notes Due August, 2017, Upgraded to Caa1 (sf); previously on November 23, 2010, Ca (sf) Placed Under Review for Possible Upgrade;

U.S. $14,800,000 Class D Deferrable Subordinated Secured Notes Due August, 2017 (current outstanding balance of $13,462,887), Upgraded to Caa3 (sf); previously on November 23, 2010, C (sf) Placed Under Review for Possible Upgrade.

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 June 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 2245 compared to 2406 in the May 2009 report, and securities rated Caa1/CCC+ or lower make up approximately 6.9% of the underlying portfolio versus 13.6% in May 2009. Additionally, defaulted securities total about $8.5 million of the underlying portfolio compared to $39.8 million in May 2009.

The overcollateralization ratios of the rated notes have also improved since the rating action in June 2009. The Senior, Class B-2, Class C and Class D overcollateralization ratios are reported at 117.7%, 112.2%, 107.2% and 103.0%, respectively, versus April 2009 levels of 105.5%, 101.1%, 96.9% and 93.5%, respectively, and all related overcollateralization tests are currently in compliance. In particular, the Class A overcollateralization ratio has increased as a result of delevering of the Class A-1 Notes, which have been paid down by approximately 9.3% or $29.2 million since the rating action in June 2009. Moody's also notes that the Class B-1, Class B-2, 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 $350.2 million, defaulted par of $11.7 million, a weighted average default probability of 21.04% (implying a WARF of 3278), a weighted average recovery rate upon default of 42.7%, and a diversity score of 53. 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.

Hewett's Island CLO III, Ltd., issued in August 2005, is a collateralized loan obligation backed primarily by a portfolio of senior secured loans.

The principal methodology used in assigning these rating was "Moody's Approach to Rating Collateralized Loan Obligations," published in August 2009.

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% (2622)

Class A-1: +2

Class A-2: +2

Class B-1: +3

Class B-2: +2

Class C: +2

Class D: +1

Moody's Adjusted WARF + 20% (3934)

Class A-1: -2

Class A-2: -1

Class B-1: -1

Class B-2: -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 equal:

Moody's Adjusted WARR + 2% (44.7%)

Class A-1: 0

Class A-2: 0

Class B-1: +1

Class B-2: +1

Class C: +1

Class D: 0

Moody's Adjusted WARR - 2% (40.7%)

Class A-1: -1

Class A-2: -1

Class B-1: 0

Class B-2: -1

Class C: -2

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 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 III, Ltd.
No Related Data.
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