USD $117 million of debt securities affected
New York, February 15, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Phoenix CLO II, Ltd.:
U.S.$65,300,000 Class B Second Priority
Deferrable Floating Rate Notes Due April 25, 2019, Upgraded
to Baa3 (sf); previously on August 18, 2009 Confirmed at Ba1
(sf);
U.S.$16,000,000 Class C-1 Third
Priority Deferrable Floating Rate Notes Due April 25, 2019,
Upgraded to Ba3 (sf); previously on August 18, 2009 Confirmed
at B1 (sf);
U.S.$5,500,000 Class C-2 Third
Priority Deferrable Fixed Rate Notes Due April 25, 2019, Upgraded
to Ba3 (sf); previously on August 18, 2009 Confirmed at B1
(sf);
U.S.$24,100,000 Class D-1 Fourth
Priority Deferrable Floating Rate Notes Due April 25, 2019 (current
outstanding balance of $22,050,327), Upgraded
to Caa2 (sf); previously on November 23, 2010 Ca (sf) Placed
Under Review for Possible Upgrade;
U.S.$1,500,000 Class D-2 Fourth
Priority Deferrable Fixed Rate Notes Due April 25, 2019 (current
outstanding balance of $1,372,428), Upgraded
to Caa2 (sf); previously on November 23, 2010 Ca (sf) Placed
Under Review for Possible Upgrade;
U.S.$10,000,000 Class 1 Combination Notes
Due April 25, 2019 (current Rated Balance of $7,106,008),
Upgraded to Ba3 (sf); previously on August 18, 2009 Downgraded
to B1 (sf).
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 an increase in the transaction's overcollateralization ratios since
the rating action in August 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 January 13, 2011, the weighted average rating factor
is currently 2480 compared to 2667 in the July 2009 report, and
securities rated Caa1/CCC or lower make up approximately 5.8%
of the underlying portfolio versus 10.6% in July 2009.
Moody's adjusted WARF has also declined since the rating action in 2009
due to a decrease in the percentage of securities with ratings on "Review
for Possible Downgrade" or with a "Negative Outlook." Additionally,
the deal has experienced a decrease in defaults, with the dollar
amount of defaulted securities reported at about $16.2 million
versus approximately $69.7 million in July 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in August 2009. The Class A, Class
B, Class C, and Class D overcollateralization ratios are reported
at 126.19%, 111.12%, 106.92%,
and 102.68%, respectively, versus July 2009
levels of 120.00%, 106.03%, 102.11%,
and 97.81%, respectively, and all related overcollateralization
tests are currently in compliance. In particular, the Class
D overcollateralization ratio has increased due to the diversion of excess
interest to delever the Class D-1 Notes and D-2 Notes,
including on the April 2010 payment date, when $2.2
million of interest proceeds reduced the outstanding balance of the Class
D-1 Notes and Class D-2 Notes by 8.5%.
Moody's also notes that the Class C Notes 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 and principal proceeds balance
of $601 million, defaulted par of $19.5 million,
a weighted average default probability of 26.02% (implying
a WARF of 3364), a weighted average recovery rate upon default of
43.50%, and a diversity score of 50. 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.
Phoenix CLO II, Ltd., issued in March 2007, 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 "Using the Structured Note Methodology to Rate CDO Combo-Notes"
published in February 2004.
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, where
a positive difference corresponds to lower expected loss), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2691)
Class X: 0
Class A: +2
Class B: +3
Class C-1: +2
Class C-2: +2
Class D-1: +3
Class D-2: +3
Class 1: +2
Class 3: +3
Moody's Adjusted WARF + 20% (4037)
Class X: 0
Class A: -2
Class B: -1
Class C-1: -2
Class C-2: -2
Class D-1: -2
Class D-2: -2
Class 1: -2
Class 3: -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.
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
Shana Sethi
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 Phoenix CLO II, Ltd.
