USD $327 million of debt securities affected
New York, March 18, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Marathon CLO II Ltd.:
US $273,000,000 CLASS A-1b Floating Rate Senior
Secured Notes, Due 2019 (current outstanding balance of $257,687,836.2),
Upgraded to Aa3 (sf); previously on June 18, 2009 Downgraded
to A2 (sf);
US $12,500,000 Class A-2 Floating Rate Senior
Secured Notes, Due 2019, Upgraded to A2 (sf); previously
on June 18, 2009 Downgraded to Baa2 (sf);
US $22,000,000 Class B Floating Rate Senior Deferrable
Interest Secured Notes, Due 2019, Upgraded to Baa2 (sf);
previously on June 18, 2009 Confirmed at Ba3 (sf);
US $22,500,000 Class C Floating Rate Senior Deferrable
Interest Secured Notes, Due 2019, Upgraded to Ba3 (sf);
previously on June 18, 2009 Confirmed at B3 (sf);
US $10,200,000 Class D Floating Rate Subordinated Deferrable
Interest Secured Notes, Due 2019, Upgraded to Caa2 (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 due to an increase in the transaction's overcollateralization
ratios, and improvement in the credit quality of the underlying
portfolio since the rating action in June 2009.
The overcollateralization ratios of the rated notes have improved primarily
due to decrease in the proportion of securities rated Caa1 and below,
since the rating action in June 2009. As per the February 2011
trustee report, the Class A, Class B, Class C,
and Class D overcollateralization ratios are reported at 124.3%,
116.0%, 108.6%, and 104.9%
respectively, versus April 2009 levels of 112.3%,
105.0%, 98.4%, and 95.1%
respectively, and all related overcollateralization tests are currently
in compliance. In addition, the Class C Notes and the Class
D Notes are no longer deferring interest, and the deferred interest
had been repaid.
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. Based on the February 2011 trustee report,
the weighted average rating factor is 2889 compared to 3641 in April 2009,
and securities rated Caa1 and below make up approximately 13.6%
of the underlying portfolio versus 21.2% in April 2009.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to approximately
$2.6 million from $14.8 million in April 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 $392
million, defaulted par of $2.6 million, weighted
average default probability of 31.0% (implying a WARF of
4145), a weighted average recovery rate upon default of 42.9%,
and a diversity score of 49. 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.
Marathon CLO II Ltd., issued on December 22, 2005,
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.
Other methodologies and factors that may have been considered in the process
of rating 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 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% (3316)
Class A-1b: +2
Class A-2: +1
Class B: +2
Class C: +1
Class D: +3
Moody's Adjusted WARF +20% (4974)
Class A-1b: -1
Class A-2: -2
Class B: -1
Class C: -2
Class D: -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 managers' 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 deals' 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) 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 and coupon
levels higher than the covenant levels due to the large difference between
the reported and covenant levels.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, 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
Aniket Deshpande
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
David H. Burger
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 Marathon CLO II Ltd.
