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Related Issuers
Rating Action:

Moody's upgrades the ratings of notes issued by Nob Hill CLO II, Limited

21 Jan 2011

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.

RATINGS RATIONALE

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 secured loans.

The principal methodology used in assigning 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 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 equal:

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.

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
Danielle Nazarian
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 Nob Hill CLO II, Limited
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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