USD $327 million of debt securities affected
New York, January 21, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Nob Hill CLO II, Limited:
U.S.$263,700,000 Class A-1 Floating
Rate Notes Due 2022 (current balance of $252,422,601),
Upgraded to Aa2 (sf); previously on April 13, 2010 Upgraded
to A1 (sf);
U.S.$22,000,000 Class B Floating Rate
Notes Due 2022, Upgraded to Baa2 (sf); previously on May 19,
2010 Upgraded to Baa3 (sf);
U.S.$20,000,000 Class C Deferrable Floating
Rate Notes Due 2022, Upgraded to Ba2 (sf); previously on May
19, 2010 Upgraded to Ba3 (sf);
U.S.$17,000,000 Class D Deferrable Floating
Rate Notes Due 2022, Upgraded to B3 (sf); previously on November
23, 2010 Caa2 (sf) Placed Under Review for Possible Upgrade;
U.S.$17,000,000 Class E Deferrable Floating
Rate Notes Due 2022 (current balance of $15,097,663),
Upgraded to Caa3 (sf); previously on November 23, 2010 Ca (sf)
Placed Under Review for Possible Upgrade.
According to Moody's, the rating actions taken on the notes result
primarily from improvement in the credit quality of the underlying portfolio
and increase in the overcollateralization ratios of the rated notes since
the rating action in May 2010.
The deal has benefited from improvement in the credit quality of the underlying
portfolio since the rating action in May 2010. Based on the December
2010 trustee report, the weighted average rating factor is 3054
compared to 3292 in April 2010, and securities rated Caa1 and below
or CCC+ and below make up approximately 13.7% of the
underlying portfolio versus 14.8% in April 2010.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to $14.7
million from approximately $25.8 million in April 2010.
Moody's also notes that the overcollateralization ratios of the
rated notes have improved. As of the latest trustee report dated
December 13, 2010, the Class A/B, Class C, Class
D, and Class E overcollateralization ratios are reported at 121.08%,
113.60%, 107.93%, and 103.36%,
respectively, versus April 2010 levels of 120.05%,
112.63%, 107.01%, and 102.26%,
respectively. The Class E overcollateralization ratio has increased
in part due to a turbo feature in the deal whereby excess interest is
diverted to delever the Class E Notes in the event of a Class E overcollateralization
ratio test failure. Furthermore, Moody's adjusted overcollateralization
ratios of the rated notes have increased more than trustee reported ratios
since the rating action in May 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 May 2010 but is currently treating them as performing securities as
they are no longer Ca or C-rated following corporate ratings upgrades.
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 $366
million, defaulted par of $18.7 million, a weighted
average default probability of 32.67% (implying a WARF of
4220), a weighted average recovery rate upon default of 41.48%,
and a diversity score of 53. 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.
Nob Hill CLO II, Limited issued on June 6, 2007, is
a collateralized loan obligation backed primarily by a portfolio of senior
The principal methodology used in assigning these ratings was "Moody's
Approach to Rating Collateralized Loan Obligations," published in
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 188.8.131.52 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, including the following:
1. Various default probabilities to capture potential defaults
in the underlying portfolio.
2. A range of recovery rate assumptions for all assets to capture
variability in recovery rates.
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% (3376)
Class A-1: +2
Class A-2: +2
Class B: +2
Class C: +2
Class D: +3
Class E: +2
Moody's Adjusted WARF + 20% (5064)
Class A-1: -1
Class A-2: -2
Class B: -2
Class C: -2
Class D: -3
Class E: -2
Below is a summary of the impact of different recovery rate 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 WARR + 2% (43.48%)
Class A-1: +1
Class A-2: +1
Class B: 0
Class C: 0
Class D: +1
Class E: 0
Moody's Adjusted WARR - 2% (39.48%)
Class A-1: 0
Class A-2: 0
Class B: -1
Class C: -1
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 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 and coupon
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.
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
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of notes issued by Nob Hill CLO II, Limited
250 Greenwich Street
New York, NY 10007