USD $348 million of debt securities affected
New York, March 10, 2011 -- Moody's Investors Service announced today that it has upgraded the following
notes issued by Hewett's Island CLO VI, Ltd.:
U.S.$255,000,000 Class A-T First
Priority Senior Secured Floating Rate Term Notes Due June 9, 2019
(current outstanding balance $231,262,519), Upgraded
to Aa2 (sf); previously on June 11, 2009 Downgraded to A1 (sf);
U.S.$50,000,000 Class A-R First
Priority Senior Secured Floating Rate Revolving Notes Due June 9,
2019 (current outstanding balance $45,256,853),
Upgraded to Aa2 (sf); previously on June 11, 2009 Downgraded
to A1 (sf);
U.S.$27,500,000 Class B Second Priority
Senior Secured Floating Rate Notes Due June 9, 2019, Upgraded
to A3 (sf); previously on June 11, 2009 Downgraded to Baa3
U.S.$15,500,000 Class C Third Priority
Senior Secured Deferrable Floating Rate Notes Due June 9, 2019,
Upgraded to Baa3 (sf); previously on November 23, 2010 Ba3
(sf) Placed Under Review for Possible Upgrade;
U.S.$15,500,000 Class D Fourth Priority
Mezzanine Secured Deferrable Floating Rate Notes Due June 9, 2019,
Upgraded to B1 (sf); previously on November 23, 2010 Caa3 (sf)
Placed Under Review for Possible Upgrade;
U.S.$16,000,000 Class E Fifth Priority
Mezzanine Secured Deferrable Floating Rate Notes Due June 9, 2019
(current outstanding balance of $13,414,792),
Upgraded to Caa2 (sf); previously on November 23, 2010 C (sf)
Placed Under Review for Possible Upgrade.
According to Moody's, the rating actions taken on the notes
result primarily from an increase in the transaction's overcollateralization
ratios and an improvement in the credit quality of the underlying portfolio
since the rating action in June 2009.
Since the rating action in June 2009, the Class A notes have been
paid down by approximately 8% or $24.9 million.
In part, as a result of the delevering, the overcollateralization
ratios have increased. As of the latest trustee report dated February
2, 2011, the Class A/B, Class C, Class D,
and Class E overcollateralization ratios are reported at 118.20%,
112.46%, 107.26%, and 103.13%,
respectively, versus May 2009 levels of 108.83%,
103.93%, 99.45%, and 95.27%
respectively, and all related overcollateralization tests are currently
in compliance. In particular, the Class E overcollateralization
ratio has increased due to the diversion of excess interest to delever
the Class E notes in the event of a Class E overcollateralization test
failure. The Class E notes have also delevered due to the diversion
of excess interest following an interest diversion test failure.
Since the rating action in June 2009, the Class E notes have delevered
by 15.1% or $2.4 million including outstanding
deferred interest. Moody's notes that the Class D and Class
E Notes are no longer deferring interest and that all previously deferred
interest has been paid in full.
Moody's also notes that the deal has benefited from improvement in the
credit quality of the underlying portfolio since the rating action in
June 2009. Based on the February 2011 trustee report, the
weighted average rating factor is 2361 compared to 2468 in May 2009,
and securities rated Caa1/CCC+ or lower make up approximately 6.9%
of the underlying portfolio versus 11.4% in May 2009.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to about $8
million from approximately $33 million in May 2009.
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 $354 million, defaulted par of $11 million,
a weighted average default probability of 26.16% (implying
a WARF of 3345), a weighted average recovery rate upon default of
42.30%, and a diversity score of 60. 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 VI, Ltd., issued in May 2007,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in this rating 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 six months.
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% (2676)
Class A-T: +2
Class A-R: +2
Class B: +2
Class C: +2
Class D: +2
Class E: +3
Moody's Adjusted WARF + 20% (4014)
Class A-T: -2
Class A-R: -2
Class B: -2
Class C: -2
Class D: -3
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 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.
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 Hewett's Island CLO VI, Ltd.
250 Greenwich Street
New York, NY 10007