USD $145 million of debt securities affected
New York, April 07, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Solar Investment Grade CBO II,
U.S.$326,500,000 Class I Senior Secured
Floating Rate Notes Due July 24, 2013 (current outstanding balance
of $112,529,778), Upgraded to Aaa (sf);
previously on June 10, 2010 Upgraded to Aa1 (sf);
U.S.$19,000,000 Class II-A Senior
Secured Floating Rate Notes Due July 24, 2013, Upgraded to
Aa1 (sf); previously on May 4, 2009 Downgraded to Ba2 (sf);
U.S.$13,000,000 Class II-B Senior
Secured Fixed Rate Notes Due July 24, 2013, Upgraded to Aa1
(sf); previously on May 4, 2009 Downgraded to Ba2 (sf).
According to Moody's, the rating actions taken on the notes result
primarily from the delevering of the Class I Notes, which have been
paid down by approximately 36% or $63.8 million since
the rating action in June 2010. As a result of the delevering,
the overcollateralization ratios have increased since the rating action
in June 2010. As of the latest trustee report dated March 25,
2011, the Senior and Class III overcollateralization ratios are
reported at 124.4% and 103.7%, respectively,
versus May 2010 levels of 113.8% and 100.4%,
Moody's notes that the deal has two pay-fixed receive-floating
interest rate swaps that are currently out of the money, and that
from time to time (including as of the March 2011 trustee report ),
the Senior and Class III interest coverage tests have failed. On
the January 2011 payment date, as a result of an interest shortfall
following payments of interest to the hedge counterparty, the Class
II Notes were paid a portion of interest from principal proceeds.
Nonetheless insofar as the swaps are scheduled to amortize and terminate
on the January 24, 2012 payment date, Moody's expects
that interest and principal proceeds will be sufficient over the next
two payment periods to pay all current interest due on the Class I Notes
and Class II Notes.
Moody's also notes that the credit profile of the underlying portfolio
has been relatively stable since the last rating action. Based
on the March 2011 trustee report, securities rated Caa1/CCC+
and below make up approximately 8.9% of the underlying portfolio
versus 9.7% in May 2010. The deal also experienced
a decrease in defaults. In particular, the dollar amount
of defaulted securities has decreased to about $6 million from
approximately $9 million in May 2010.
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 $166 million, defaulted par of $18 million,
a weighted average default probability of 1.24% (implying
a WARF of 1088), a weighted average recovery rate upon default of
26.25%, and a diversity score of 20. 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.
Solar Investment Grade CBO II, Ltd., issued in July
2001, is a collateralized bond obligation backed primarily by a
portfolio of senior unsecured bonds.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" published in August 2009.
This publication incorporates rating criteria that apply to both collateralized
loan obligations and collateralized bond obligations.
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, due to the low diversity of
the collateral pool, CDOROM 2.8 was used to simulate a default
distribution that was then applied as an input in the cash flow model.
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% (870)
Class I: 0
Class II-A: 0
Class II-B: 0
Class III-A: +1
Class III-B: 0
Moody's Adjusted WARF + 20% (1306)
Class I: 0
Class II-A: -1
Class II-B: -1
Class III-A: 0
Class III-B: 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, 2) divergence
in legal interpretation of CDO documentation by different transactional
parties due to embedded ambiguities, and 3) potential additional
expected loss associated with swap agreements in CDOs as a result of the
recent U.S. bankruptcy court ruling on Lehman swap termination
in the Dante case.
Sources of additional performance uncertainties are described below:
1) Delevering: The main source of uncertainty in this transaction
is whether delevering from unscheduled principal proceeds will continue
and at what pace. Delevering may accelerate due to high prepayment
levels in the bond market and/or collateral sales by the manager,
which may have significant impact on the notes' ratings.
2) 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.
3) Long-dated assets: The presence of assets that mature
beyond the CLO's legal maturity date exposes the deal to liquidation
risk on those assets. Moody's assumes an asset's terminal
value upon liquidation at maturity to be equal to the lower of an assumed
liquidation value (depending on the extent to which the asset's
maturity lags that of the liabilities) and the asset's current market
4) Lack of portfolio granularity: The performance of the portfolio
depends to a large extent on the credit conditions of a few large obligors,
especially when they experience jump to default. Due to the deal's
low diversity score and lack of granularity, Moody's supplemented
its typical Binomial Expansion Technique analysis with a simulated default
distribution using Moody's CDOROM(TM) software and/or individual
5) The deal has two pay-fixed receive-floating interest
rate swaps that are currently out of the money. If fixed rate assets
prepay or default, there would be a more substantial mismatch between
the swap notional and the amount of fixed assets. Payments to hedge
counterparties consume a large portion or all of the interest proceeds.
Payment timing mismatches between assets and liabilities may cause additional
concerns. If the deal does not receive sufficient projected principal
proceeds on a payment date to supplement the interest proceeds shortfall,
a heightened risk of interest payment default could occur. Similarly,
if principal proceeds are used to pay interest, there may ultimately
be a risk of payment default on the principal of the notes.
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.
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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
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 Solar Investment Grade CBO II, Ltd.
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New York, NY 10007