USD $2.6 billion of debt securities affected
New York, March 10, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by KKR Financial CLO 2007-1,
Ltd.:
U.S.$1,849,000,000 Class A Senior
Secured Floating Rate Notes Due 2021 (current balance of $1,555,539,837),
Upgraded to Aaa (sf); previously on February 25, 2009 Downgraded
to Aa1 (sf);
U.S.$220,250,000 Class B Senior Secured
Floating Rate Notes Due 2021, Upgraded to Aa2 (sf); previously
on June 8, 2010 Upgraded to A1 (sf);
U.S.$299,250,000 Class C Deferrable Mezzanine
Secured Floating Rate Notes Due 2021, Upgraded to A2 (sf);
previously on June 8, 2010 Upgraded to Baa2 (sf);
U.S.$340,500,000 Class D Deferrable Mezzanine
Secured Floating Rate Notes Due 2021, Upgraded to Baa3 (sf);
previously on June 8, 2010 Upgraded to B1 (sf);
U.S.$134,000,000 Class E Deferrable Mezzanine
Secured Floating Rate Notes Due 2021, Upgraded to B1 (sf);
previously on November 23, 2010 Caa2 (sf) Placed Under Review for
Possible Upgrade;
U.S.$61,750,000 Class F Deferrable Mezzanine
Secured Floating Rate Notes Due 2021, Upgraded to B3 (sf);
previously on November 23, 2010 Ca (sf) Placed Under Review for
Possible Upgrade.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from an increase in the overcollateralization ratios of the
rated notes since the rating action in June 2010. As of the latest
trustee report dated February 4, 2011, the Senior overcollateralization
ratio, Class C/D, and Class E overcollateralization ratios
are reported at 180.58%, 132.75%,
and 125.77%, respectively, versus April 2010
levels of 177.52%, 130.16%, and
122.69%, respectively, and all related overcollateralization
tests are currently in compliance. The overcollateralization ratios
have improved in part due to a decrease in the number of defaulted CLO
tranches. A number of CLO tranches were defaulted and carried at
depressed market values in the rating action in June 2010 but are currently
treated as performing securities due to improved credit qualities.
Furthermore, Moody's adjusted overcollateralization ratios of the
rated notes have increased more than trustee reported ratios since the
rating action in June 2010 due to a decrease in the percentage of securities
with Ca or C ratings. Moody's treated these Ca or C-rated
securities as defaulted securities in the rating action in June 2010 but
is currently treating them as performing securities as they are no longer
Ca or C-rated following corporate ratings upgrades.
Moody's also notes that the credit quality of the underlying portfolio
has improved since the rating action in June 2010. Based on the
February 2011 trustee report, the weighted average rating factor
is 3416 compared to 3548 in April 2010. The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities has decreased to $51 million from approximately
$122 million in April 2010.
Despite improvements in certain key portfolio metrics, the transaction
has exposure to securities rated Caa1/CCC+ or lower that make up
approximately 19% of the underlying portfolio. Moody's also
noted that the portfolio includes a material concentration in CLO securities
that are issued by affiliates of the collateral manager, which Moody's
views as potentially exposing the notes to additional correlation risk.
Furthermore, the transaction has large single obligor exposures
to debt relating to recent vintages of buyouts and other highly leveraged
financial transactions, which Moody's views to be particularly vulnerable
to credit deterioration in the current market environment.
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 $3.2
billion, defaulted par of $55 million, a weighted average
default probability of 42.32% (implying a WARF of 5365),
a weighted average recovery rate upon default of 36.7%,
and a diversity score of 30. 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.
KKR Financial CLO 2007-1, Ltd. issued on May 22,
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 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, whereby a positive difference corresponds
to lower expected losses), assuming that all other factors are held
equal:
Moody's Adjusted WARF - 20% (4292)
Class A: 0
Class B: +2
Class C: +2
Class D: +2
Class E: +2
Class F: +2
Moody's Adjusted WARF + 20% (6438)
Class A: -1
Class B: -2
Class C: -2
Class D: -2
Class E: -1
Class F: -4
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. However,
as part of the base case, Moody's considered spread levels higher
than the covenant levels due to the large difference between the reported
and covenant levels.
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
Shan Lai
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Yu Sun
VP - Senior Credit Officer
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 KKR Financial CLO 2007-1, Ltd.
