USD $449 million of debt securities affected
New York, March 23, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Phoenix CLO III, Ltd.:
U.S. $336,000,000 Class A-1 Senior
Notes Notes (Current Balance of $320,905,338),
Upgraded to Aaa (sf); previously on Jun 11, 2009 Downgraded
to Aa3 (sf)
U.S. $37,000,000 Class A-2 Senior
Notes Notes, Upgraded to Aa3 (sf); previously on Jun 11,
2009 Downgraded to A2 (sf)
U.S. $33,000,000 Class B Senior Notes
Notes, Upgraded to A3 (sf); previously on Jun 11, 2009
Downgraded to Baa2 (sf)
U.S. $24,000,000 Class C Deferrable Mezzanine
Notes Notes, Upgraded to Baa3 (sf); previously on Jun 11,
2009 Downgraded to Ba2 (sf)
U.S. $19,000,000 Class D Deferrable Mezzanine
Notes Notes, Upgraded to B1 (sf); previously on Jun 11,
2009 Downgraded to Caa1 (sf)
U.S. $13,000,000 Class E Deferrable Junior
Notes Notes, Upgraded to Caa1 (sf); previously on Nov 23,
2010 C (sf) Placed Under Review for Possible Upgrade
U.S. $3,000,000 Class F Combination Notes
Notes (Current Rated Balance of $2,390,707),
Upgraded to A3 (sf); previously on Jun 11, 2009 Downgraded
to Ba2 (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 June 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 February 7, 2011, the weighted average rating factor
is currently 2459 compared to 2740 in the June 2009 report, and
securities rated Caa1/CCC+ or lower make up approximately 5.75%
of the underlying portfolio versus 12.57% in June 2009.
Additionally, defaulted securities total about $9.4
million of the underlying portfolio compared to $27.0 million
in June 2009.
The overcollateralization ratios of the rated notes have also improved
since the rating action in June 2009. The Class AB, Class
C and Class D overcollateralization ratios are reported at 117.9%,
111.1% and 106.2%, respectively,
versus June 2009 levels of 111.3%, 105.1%
and 100.5%, respectively, and all related overcollateralization
tests are currently in compliance. Moody's also notes that
the Class D and Class E 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 $456.4 million, defaulted par of $11.9
million, a weighted average default probability of 29.07%
(implying a WARF of 3730), a weighted average recovery rate upon
default of 42.88%, and a diversity score of 65.
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 III, Ltd., previously known as Avenue CLO
VI, Ltd. and issued in May 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
Moody's modeled the transaction using the Binomial Expansion Technique,
as described in Section 184.108.40.206 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
Moody's Adjusted WARF --20% (2984)
Class A-1: 0
Class A-2: +2
Class B: +3
Class C: +2
Class D: +2
Class E: +3
Class F: +1
Moody's Adjusted WARF +20% (4476)
Class A-1: -2
Class A-2: -2
Class B: -2
Class C: -2
Class D: -2
Class E: -3
Class F: 0
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.
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.
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service
David H. Burger
VP - Senior Credit Officer
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's upgrades the ratings of notes issued by Phoenix CLO III, Ltd.
250 Greenwich Street
New York, NY 10007