USD $104.6 million of debt securities affected
New York, April 14, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Lightpoint CLO 2004-1, Ltd.:
U.S.$208,000,000 Class A-1-A
Senior Secured Floating Rate Notes, due February 2014 (current outstanding
balance of $18,816,554), Upgraded to Aaa (sf);
previously on March 18, 2010 Upgraded to Aa1 (sf);
U.S.$22,000,000 Class A-1-B
Senior Secured Floating Rate Notes, due February 2014, Upgraded
to Aaa (sf); previously on March 18, 2010 Upgraded to Aa3 (sf);
U.S.$26,000,000 Class B Senior Secured
Floating Rate Notes, due February 2014, Upgraded to Aaa (sf);
previously on March 18, 2010 Confirmed at Baa1 (sf);
U.S.$22,000,000 Class X 5.25%
Fixed Rate Deferrable Amortizing Senior Secured Notes, due February
2014 (current outstanding balance of $6,111,380),
Upgraded to Aaa (sf); previously on March 18, 2010 Confirmed
at Ba1 (sf);
U.S.$8,500,000 Class C Deferrable Senior
Secured Floating Rate Secured Notes, due February 2014, Upgraded
to Aa3 (sf); previously on March 18, 2010 Confirmed at Ba2
(sf);
U.S.$8,500,000 Class D Secured Floating
Rate Notes, due February 2014 (current outstanding balance of $8,879,480),
Upgraded to Baa2 (sf); previously on March 18, 2010 Confirmed
at B2 (sf);
U.S.$11,000,000 Class E Subordinated
Secured Floating Rate Notes, due February 2014 (current outstanding
balance of $14,312,047), Upgraded to Caa3 (sf);
previously on February 11, 2009 Downgraded to Ca (sf).
RATINGS RATIONALE
According to Moody's, the upgrade actions today result primarily
from an increase in the overcollateralization of the notes since the rating
action in March 2010. The notes benefited from the delevering of
the Class A-1A Notes, which have been paid down by approximately
$96.6 million or 84% since March 2010. Based
on the latest trustee report dated March 31, 2011, The Class
A/B, Class C, Class D, and Class E overcollateralization
ratios increased to 154.97%, 137.48%,
122.96%, and 105.11%, respectively,
from 111.83%, 106.05%, 100.75%,
and 93.90% in February 2010. Notwithstanding the
substantial improvement in the overcollateralization ratios, Moody's
notes that the Class D Interest Coverage Test and Class E Interest Coverage
Test are currently out of compliance, reported at 76.07%
and 39.79%, respectively, in March 2011,
versus a trigger level of 110% and 105%, respectively.
The Class E Notes continues to defer interest, while the Class D
Notes have resumed paying interest but still carry a deferred interest
balance.
Moody's also notes that the credit quality of the underlying portfolio
has improved since the rating action in May 2010, which is observed
through a decrease 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, the weighted
average rating factor is currently 2625 compared to 2760 in February 2010,
and securities rated Caa1/CCC+ or lower make up approximately 13.2%
of the underlying portfolio versus 14.9% in February 2010.
Additionally, the deal experienced a decrease in defaulted securities,
which currently total about $988,000, compared to $11.1
million of defaulted collateral reported in February 2010.
As reported by the Trustee, on December 10, 2008 the transaction
experienced an Event of Default caused by a failure of the Overcollateralization
Ratio with respect to the Class A-1A Notes to be at least equal
to 103%, as required under Section 5.1(d) of the Indenture
dated February 19, 2004. On April 8, 2010, a
Majority of the Controlling Class waived the Section 5.1(d) Event
of Default pursuant to Section 5.14 of the Indenture. One
consequence of this waiver is to permit the Collateral Manager to direct
sales of Debt Obligations under Section 12.1 of the Indenture,
which are not permitted while an Event of Default is continuing.
The waiver of the Section 5.1(d) Event of Default is not intended,
however, to waive the acceleration of the Notes, which remains
in effect.
Today's rating actions also reflect Moody's consideration that the risk
of collateral liquidation has receded since the last rating action due
to improvement in loan market values. As provided in Article V
of the Indenture during the occurrence and continuance of an event of
default, the Holders of at least 66-2/3% of the Aggregate
Outstanding Amount of each Class of Notes may direct the Trustee to proceed
with the sale and liquidation of the collateral, potentially resulting
in losses to the note holders. According to a letter to the investors
from the collateral manager, Neuberger Berman Fixed Income LLC,
dated February 14, 2011, the CLO collateral's mark-to-market
improved to 94.62% as of January 31, 2011, compared
to 66.48% as of December 31, 2008 and 87.81%
as of December 31, 2009. Since each class of notes must vote
in order to liquidate the CLO collateral during the occurrence and continuation
of an event of default, in Moody's opinion the increase in loan
price raises the par coverage of all the notes based on market value and
lowers the likelihood that the mezzanine and junior note holders will
vote to liquidate.
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 $109.8 million, defaulted par of $2.9
million, a weighted average default probability of 19.27%
(implying a WARF of 3694), a weighted average recovery rate upon
default of 42.19 %, and a diversity score of 32.
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.
Lightpoint CLO 2004-1, Ltd., issued in February
2004, is a collateralized loan obligation backed primarily by a
portfolio of senior secured loans.
The principal methodologies used in this rating were "Moody's Approach
to Rating Collateralized Loan Obligations" published in August 2009
and "Updated Approach to the Usage of Credit Estimates in Rated Transactions"
published in October 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.
For securities whose default probabilities are assessed through credit
estimates ("CEs"), Moody's applied additional default
probability stresses by assuming an equivalent of Caa3 for CEs that were
not updated within the last 15 months, which currently account for
approximately 3% of the collateral balance. In addition,
Moody's applied a 1 notch-equivalent assumed downgrade for CEs
last updated between 12-15 months ago. For each CE where
the related exposure constitutes more than 3% of the collateral
pool, Moody's applied a 2-notch equivalent assumed
downgrade (but only on the CEs representing in aggregate the largest 30%
of the pool) in lieu of the aforementioned stresses. Notwithstanding
the foregoing, in all cases the lowest assumed rating equivalent
is Caa3.
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
equal:
Moody's Adjusted WARF -- 20% (2955)
Class A-1-A: 0
Class A-1-B: 0
Class B: 0
Class X: 0
Class C: +2
Class D: +3
Class E: +2
Moody's Adjusted WARF + 20% (4433)
Class A-1-A: 0
Class A-1-B: 0
Class B: 0
Class X: -1
Class C: -2
Class D: -1
Class E: -1
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 behaviour 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) Delevering: The main source of uncertainty in this transaction
is whether delevering from unscheduled principal proceeds will continue
and at what pace. Delevering may accelerate due to high prepayment
levels in the loan market and/or collateral sales by the manager,
which may have significant impact on the notes' ratings.
2) 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.
3) Long-dated assets: The presence of assets that mature
beyond the CLO's legal maturity date exposes the deal to liquidation
risk on those assets. Moody's assumes an asset's terminal
value upon liquidation at maturity to be equal to the lower of an assumed
liquidation value and the asset's current market value.
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
Min Xu
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Ramon O. Torres
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 Lightpoint CLO 2004-1, Ltd.
