USD $221 million of debt securities affected
New York, December 09, 2010 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Velocity CLO, Ltd.:
U.S.$229,000,000 Class A Senior Secured
Notes Due 2016 (current balance of $176,267,002),
Upgraded to Aaa (sf); previously on July 29, 2009 Downgraded
to Aa3 (sf);
U.S.$22,000,000 Class B Senior Secured
Interest Deferrable Notes Due 2016, Upgraded to Baa1 (sf);
previously on July 29, 2009 Confirmed at Ba1 (sf);
U.S.$14,000,000 Class C Senior Secured
Interest Deferrable Notes Due 2016, Upgraded to Ba3 (sf); previously
on July 29, 2009 Downgraded to B2 (sf);
U.S.$8,000,000 Class D Senior Secured
Interest Deferrable Notes Due 2016 (current balance of $5,076,339),
Upgraded to B2 (sf); previously on July 29, 2009 Downgraded
to Ca (sf);
U.S.$5,300,000 Class 1 Composite Securities
Due 2016 (current rated balance of $3,198,769),
Upgraded to Baa1 (sf); previously on July 29, 2009 Downgraded
to Ba1 (sf).
RATINGS RATIONALE
According to Moody's, the rating action taken on the notes results
primarily from the delevering of the Class A Notes and improvement in
the credit quality of the underlying portfolio since the last rating action
in July 2009.
The overcollateralization ratios of the rated notes have improved as a
result of delevering of the Class A Notes, which have been paid
down by approximately 21% or $47 million since the last
rating action in July 2009. A substantial proportion of this paydown
is attributable to principal prepayments on the underlying loans.
As of the latest trustee report dated November 10, 2010, the
Class A, Class B, Class C, and Class D overcollateralization
ratios are reported at 127.23%, 115.24%,
108.72%, and 106.41%, respectively,
which does not reflect the $47 million in paydown of the Class
A notes in November 2010, versus June 2009 levels of 119.36%,
108.66%, 102.8%, and 100.5%,
respectively. The Class D overcollateralization ratio has increased
due a turbo feature in the deal whereby 20% of excess interest
is diverted to delever the Class D Notes before payment to incentive management
fees and Subordinated Notes. Moody's expects delevering to continue
as a result of the end of the deal's reinvestment period in February 2010.
Moody's also notes that the deal has benefited from improvement in the
credit quality of the underlying portfolio since the last rating action.
Based on the November 2010 trustee report, the weighted average
rating factor is 2658 compared to 2841 in June 2009, and securities
rated Caa1 and below or CCC+ and below make up approximately 10.5%
of the underlying portfolio versus 17.9% in June 2009.
The deal also experienced a decrease in defaults. In particular,
the dollar amount of defaulted securities has decreased to $0.1
million from approximately $15.7 million in June 2009.
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 $235 million,
defaulted par of $0.2 million, weighted average default
probability of 21.1% (implying a WARF of 3300), a
weighted average recovery rate upon default of 44.9%,
and a diversity score of 57. 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.
Velocity CLO, Ltd. issued on August 31, 2004,
is a collateralized loan obligation backed primarily by a portfolio of
senior secured loans.
The principal methodologies used in these ratings 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 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% (2640)
Class A: 0
Class B: +3
Class C: +2
Class D: +2
Class 1 Composite Securities: +3
Moody's Adjusted WARF + 20% (3960)
Class A: -1
Class B: -1
Class C: -2
Class D: -2
Class 1 Composite Securities: -1
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% (46.9%)
Class A: 0
Class B: +1
Class C: 0
Class D: 0
Class 1 Composite Securities: +1
Moody's Adjusted WARR - 2% (42.9%)
Class A: -1
Class B: 0
Class C: 0
Class D: 0
Class 1 Composite Securities: 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 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) 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 loan market and/or collateral sales by the manager,
which may have significant impact on the notes' ratings.
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.
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.
New York
Shan Lai
Associate Analyst
Structured Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Yu Sun
VP - Senior Credit Officer
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 Velocity CLO, Ltd.
