Moody's also upgrades the rating on $5.9 million of notes issued by USCFIII 2.5% Combination Security Trust
New York, April 20, 2017 -- Moody's Investors Service has upgraded the ratings on the following notes
issued by US Capital Funding III, Ltd.:
U.S.$111,000,000 Class A-1 Floating
Rate Senior Notes Due 2035 (current balance of $16,601,966.66),
Upgraded to Aa1 (sf); previously on July 31, 2014 Upgraded
to Aa3 (sf)
U.S.$39,100,000 Class B-1 Floating
Rate Senior Subordinate Notes Due 2035, Upgraded to Caa1 (sf);
previously on May 8, 2014 Upgraded to Caa2 (sf)
U.S.$48,000,000 Class B-2 Fixed/Floating
Rate Senior Subordinate Notes Due 2035, Upgraded to Caa1 (sf);
previously on May 8, 2014 Upgraded to Caa2 (sf)
Moody's also affirmed the rating on the following notes:
U.S.$23,000,000 Class A-2 Floating
Rate Senior Notes Due 2035, Affirmed A3 (sf); previously on
July 31, 2014 Upgraded to A3 (sf)
Moody's also upgraded the rating on the following notes issued by USCFIII
2.5% Combination Security Trust:
U.S.$7,500,000 Series A Trust Units (current
rated balance of $5,944,018.98), Upgraded
to Ba3 (sf); previously on July 31, 2014 Confirmed B2 (sf)
US Capital Funding III, Ltd., issued in November 2004,
is a collateralized debt obligation (CDO) backed entirely by a portfolio
of bank trust preferred securities (TruPS).
USCFIII 2.5% Combination Security Trust, issued in
November 2004, is a trust that issued combination notes comprising
$2.0 million Class B-1 notes, $2.0
million Class B-2 notes, and $2.6 million Subordinate
Income Notes issued by US Capital Funding III, Ltd.,
and a Fannie Mae strip with a face value of $3.5 million
maturing on November 15, 2029.
RATINGS RATIONALE
The rating actions are primarily a result of the deleveraging of the Class
A-1 notes, an increase in the transaction's overcollateralization
(OC) ratios and the resumption of interest payments of a previously deferring
asset since June 2016.
The Class A-1 notes have paid down by approximately 50.1%
or $16.7 million since June 2016 using principal proceeds
from the redemption of underlying assets. Based on Moody's
calculations, the OC ratios for the Class A-1, Class
A-2, and Class B-2 notes have improved to 750.81%,
314.76% and 98.38%, respectively,
from June 2016 levels of 398.73%, 235.75%
and 92.52%, respectively. The Class A-1
notes will continue to benefit from the redemption of any assets in the
collateral pool. In addition, one asset that had been previously
deferring, with a balance of $7.0 million, has
cured its interest deferral and resumed interest payments in June 2016.
The upgrade action on the Series A Trust Units reflects the high coverage
from the underlying components and an improvement in the credit quality
of the Class B-1 and Class B-2 components. Currently,
the units' rated balance of $5.9 million is backed
by $2.0 million of Class B-1 notes, $2.0
million of Class B-2 notes, $2.6 million of
Subordinate Income Notes, and $3.5 million of the
Fannie Mae strip.
Methodology Used for the Rating Action
The principal methodology used in this rating was "Moody's Approach to
Rating TruPS CDOs," published in October 2016. Please see
the Rating Methodologies page on www.moodys.com for a copy
of this methodology.
Factors that Would Lead to an Upgrade or Downgrade of the Rating
This transaction is subject to a number of factors and circumstances that
could lead to either an upgrade or downgrade of the ratings, as
described below:
1) Macroeconomic uncertainty: TruPS CDOs performance could be negatively
affected by uncertainty about credit conditions in the general economy.
Moody's has a stable outlook on the US banking sector.
2) Portfolio credit risk: Credit performance of the assets collateralizing
the transaction that is better than Moody's current expectations
could have a positive impact on the transaction's performance.
Conversely, asset credit performance weaker than Moody's current
expectations could have adverse consequences on the transaction's
performance.
3) Deleveraging: One source of uncertainty in this transaction is
whether deleveraging from unscheduled principal proceeds and excess interest
proceeds will continue and at what pace. Note repayments that are
faster than Moody's current expectations could have a positive impact
on the notes' ratings, beginning with the notes with the highest
payment priority.
4) Exposure to non-publicly rated assets: The deal contains
a large number of securities whose default probability Moody's assesses
through credit scores derived using RiskCalc™ or credit estimates.
Because these are not public ratings, they are subject to additional
uncertainties.
In addition to the base case analysis, Moody's also conducted sensitivity
analyses to test the impact of a number of default probabilities on the
rated notes relative to the base case modeling results, which may
be different from the current public ratings of the notes. Below
is a summary of the impact of different default probabilities (expressed
in terms of WARF) on all of the rated notes (by the difference in the
number of notches versus the current model output, for which a positive
difference corresponds to lower expected loss):
Assuming a two-notch upgrade to assets with below-investment
grade ratings or rating estimates (WARF of 512)
Class A-1: 0
Class A-2: +2
Class B-1: +1
Class B-2: +1
Series A Trust Units: +1
Assuming a two-notch downgrade to assets with below-investment
grade ratings or rating estimates (WARF of 1206)
Class A-1: 0
Class A-2: -1
Class B-1: -1
Class B-2: -1
Series A Trust Units: -1
Loss and Cash Flow Analysis
Moody's applied a Monte Carlo simulation framework in Moody's
CDOROM™ to model the loss distribution for TruPS CDOs. The
simulated defaults and recoveries for each of the Monte Carlo scenarios
defined the reference pool's loss distribution. Moody's
then used the loss distribution as an input in its CDOEdge™ cash
flow model. CDOROM™ is available on www.moodys.com
under Products and Solutions -- Analytical models,
upon receipt of a signed free license agreement.
The key model inputs Moody's used in its analysis, such as
par, weighted average rating factor, and weighted average
recovery rate, are based on its methodology and could differ from
the trustee's reported numbers. In its base case, Moody's
analyzed the underlying collateral pool has having a performing par of
$124.7 million, defaulted par of $17.0
million, a weighted average default probability of 8.40%
(implying a WARF of 785), and a weighted average recovery rate upon
default of 10.0%.
In addition to the quantitative factors Moody's explicitly models,
qualitative factors are part of rating committee considerations.
Moody's considers the structural protections in the transaction,
the risk of an event of default, recent deal performance under current
market conditions, the legal environment and specific documentation
features. All information available to rating committees,
including macroeconomic forecasts, inputs from other Moody's analytical
groups, market factors, and judgments regarding the nature
and severity of credit stress on the transactions, can influence
the final rating decision.
The portfolio of this CDO contains TruPS issued by small to medium sized
U.S. community banks that Moody's does not rate publicly.
To evaluate the credit quality of bank TruPS that do not have public ratings,
Moody's uses RiskCalc™, an econometric model developed by
Moody's Analytics, to derive credit scores. Moody's evaluation
of the credit risk of most of the bank obligors in the pool relies on
the latest FDIC financial data.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity
analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions of the disclosure form.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Svetlana Zaitseva
Associate Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Oktay Veliev
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
