USD $38 million of debt securities affected
New York, October 29, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Silverado CLO 2006-II Limited:
U.S.$20,750,000 Class B Senior Secured
Deferrable Floating Rate Notes due 2020, Upgraded to Baa3 (sf);
previously on July 24, 2009 Confirmed at Ba1 (sf)
U.S.$17,500,000 Class C Senior Secured
Deferrable Floating Rate Notes due 2020, Upgraded to B1 (sf);
previously on July 24, 2009 Confirmed at B2 (sf).
According to Moody's, the rating actions taken on the notes result
primarily from improvement in credit quality of the underlying portfolio
and an increase in the overcollateralization of the notes since the rating
actions 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). In particular, as of the latest trustee report dated
October 5, 2010, the weighted average rating factor was 2336
as compared to 2810 in June 2009. The dollar amount of defaulted
securities has decreased to about $2 million from approximately
$13 million in June 2009. Based on the October 2010 report,
securities rated Caa1/CCC+ or lower make up approximately 5%
of the underlying portfolio versus 11.7% in June 2009.
Additionally, the overcollateralization ratios have increased since
the rating action in June 2009 and are currently all in compliance.
The Class A, Class B, Class C, and Class D Overcollateralization
Tests are reported at 123.99%, 115.24%,
108.77, and 104.65%, respectively versus
June 2009 levels of 121.24%, 112.68%,
106.35%, and 102.33%.
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 of $336.9
million, defaulted par of $3 million, weighted average
default probability of 26.94% (implying a WARF of 3526),
a weighted average recovery rate upon default of 43.36%,
and a diversity score of 55. 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.
Silverado CLO 2006-II Limited, issued in October 2006,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodology used in rating Silverado CLO 2006-II
Limited was "Moody's Approach to Rating Collateralized Loan Obligations"
rating methodology published in August 2009. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found on Moody's website.
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 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, 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 losses), assuming
that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2821)
Class A-1: +2
Class A-1S: 0
Class A-1J: +2
Class A-2: +2
Class B: +3
Class C: +2
Class D: +3
Moody's Adjusted WARF + 20% (4231)
Class A-1: -2
Class A-1S: -2
Class A-1J: -2
Class A-2: -2
Class B: -1
Class C: -2
Class D: -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 losses), assuming that all other factors are held
Moody's Adjusted WARR + 2% (45.36 %)
Class A-1: 0
Class A-1S: 0
Class A-1J: 0
Class A-2: 0
Class B: +1
Class C: 0
Class D: +1
Moody's Adjusted WARR - 2% (43.36%)
Class A-1: -1
Class A-1S: -1
Class A-1J: -1
Class A-2: -1
Class B: 0
Class C: -1
Class D: -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 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) 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 deals' 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.
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. With respect
to the weighted average spread, we analyzed the impact assuming
a mid-point between the reported and the covenanted value to give
some credit to the deal's higher weighted average spread.
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.
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.
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.
Vice President - Senior Analyst
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 Silverado CLO 2006-II Limited
250 Greenwich Street
New York, NY 10007