USD 233 million of debt securities affected
New York, April 28, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Market Square CLO Ltd.:
U.S. $232,500,000 Class A Senior Secured
Floating Rate Notes Due 2017 (current balance of $189,199,566),
Upgraded to Aa1 (sf); previously on July 9, 2009 Downgraded
to Aa2 (sf);
U.S. $27,000,000 Class B Second Priority
Deferrable Floating Rate Notes Due 2017, Upgraded to Baa2 (sf);
previously on July 9, 2009 Confirmed at Ba1 (sf);
U.S. $8,250,000 Class C Third Priority
Deferrable Floating Rate Notes Due 2017, Upgraded to Ba3 (sf);
previously on July 9, 2009 Confirmed at B1 (sf);
U.S. $8,250,000 Class D Fourth Priority
Deferrable Floating Rate Notes Due 2017, Upgraded to Caa2 (sf);
previously on July 9, 2009 Downgraded to Caa3 (sf).
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 July 2009.
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 April 2011, the weighted average rating factor is currently
2420 compared to 2667 in the June 2009 report, and securities rated
Caa1 or lower make up approximately 7.21% of the underlying
portfolio versus 13.88% in June 2009. Additionally,
defaulted securities total about $6.0 million of the underlying
portfolio compared to $24.6 million in June 2009.
Since the rating action in July 2009, the Class A Notes have been
paid down by about $43 million from an original balance of $232.5
million, largely due to overcollateralization tests' failures.
As a result, the overcollateralization ratios of the rated notes
have improved. The Class A, Class B, Class C,
and Class D overcollateralization ratios are reported at 127.59%,
111.76%, 107.68%, and 103.84%,
respectively, versus June 2009 levels of 116.80%,
104.55%, 101.30%, and 98.13%,
respectively, and all related overcollateralization tests are currently
in compliance. Moody's also notes that the 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 balance, including principal proceeds,
of $239 million, defaulted par of $6.4 million,
a weighted average default probability of 20.0% (implying
a WARF of 3117), a weighted average recovery rate upon default of
42.9%, and a diversity score of 72. 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.
Market Square CLO Ltd., issued in April 2005, is a
collateralized loan obligation backed primarily by a portfolio of senior
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 126.96.36.199 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 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% (2493)
Class A: 0
Class B: +3
Class C: +2
Class D: +2
Moody's Adjusted WARF + 20% (3740)
Class A: -1
Class B: -2
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 strategies 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. 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 selling 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 (depending on the extent to which the asset's maturity lags that
of the liabilities) and the asset's current market value.
Further information on Moody's analysis of this transaction is available
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's Investors
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 Market Square CLO Ltd.
250 Greenwich Street
New York, NY 10007