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Related Issuers
Rating Action:

Moody's upgrades the ratings of notes issued by Veritas CLO I, Ltd.

04 Feb 2011

USD $181 million of debt securities affected

New York, February 04, 2011 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Veritas CLO I, Ltd.:

U.S.$229,000,000 Class A First Priority Senior Secured Floating Rate Notes due September 5, 2016 (current outstanding balance of $127,652,696), Upgraded to Aaa (sf); previously on November 23, 2010 A2 (sf) Placed Under Review for Possible Upgrade;

U.S.$19,000,000 Class B Second Priority Senior Secured Floating Rate Notes due September 5, 2016, Upgraded to A1 (sf); previously on November 23, 2010 Ba1 (sf) Placed Under Review for Possible Upgrade;

U.S.$16,000,000 Class C Third Priority Mezzanine Secured Floating Rate Deferrable Interest Notes due September 5, 2016, Upgraded to Baa3 (sf); previously on November 23, 2010 B3 (sf) Placed Under Review for Possible Upgrade;

U.S.$10,500,000 Class D Fourth Priority Mezzanine Secured Floating Rate Deferrable Interest due September 5, 2016, Upgraded to B3 (sf); previously on November 23, 2010 Ca (sf) Placed Under Review for Possible Upgrade;

U.S.$8,000,000 Class E Fifth Priority Mezzanine Secured Floating Rate Deferrable Interest Notes due September 5, 2016 , Upgraded to Caa3 (sf); previously on November 23, 2010 C (sf) Placed Under Review for Possible Upgrade.

RATINGS RATIONALE

According to Moody's, the rating actions taken on the notes result primarily from the delevering of the Class A Notes, which have been paid down by approximately 44% or $99.8 million since the rating action in June 2009. As a result of the delevering, the overcollateralization ratios have increased since the rating action in June 2009. As of the latest trustee report dated December 31, 2010, the Class A/B, Class C, Class D, and Class E overcollateralization ratios are reported at 126.97%, 114.48%, 107.54%, and 102.79%, respectively, versus April 2009 levels of 113.24%, 106.34%, 102.25%, and 99.34%, respectively, and all related overcollateralization tests are currently in compliance. Moody's also notes that the Class E notes are no longer deferring interest and that all previously deferred interest has been paid in full.

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. Moody's adjusted WARF has declined since the rating action in June 2009 due to a decrease in the percentage of securities with ratings on "Review for Possible Downgrade" or with a "Negative Outlook." In addition, securities rated Caa1/CCC+ or lower make up approximately 12.3% of the underlying portfolio in December 2010 versus 17.8% in April 2009. The deal also experienced a decrease in defaults. In particular, defaulted securities total about $4.4 million of the underlying portfolio compared to $9.9 million in April 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 balance of $173 million, defaulted par of $8 million, a weighted average default probability of 23.72% (implying a WARF of 3646), a weighted average recovery rate upon default of 41.42%, and a diversity score of 54. 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.

Veritas CLO I, Ltd., issued in August 2004, is a collateralized loan obligation backed primarily by a portfolio of senior secured loans.

The principal methodology used in this rating was "Moody's Approach to Rating Collateralized Loan Obligations" published in August 2009.

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, whereby a positive difference corresponds to lower expected losses), assuming that all other factors are held equal:

Moody's Adjusted WARF -- 20% (2917)

Class A: 0

Class B: +2

Class C: +2

Class D: +3

Class E: +1

Moody's Adjusted WARF + 20% (4375)

Class A: -1

Class B: -2

Class C: -2

Class D: -3

Class E: 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) 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.

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 value.

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
Rudolph Bunja
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 Veritas CLO I, Ltd.
No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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