New York, June 30, 2015 -- Moody's Investors Service has upgraded the ratings on the following notes
issued by Alesco Preferred Funding II, Limited:
U.S. $150,000,000 Class A-1 First
Priority Senior Secured Floating Rate Notes due January 2034 (current
balance of $43,750,145), Upgraded to Aaa (sf);
previously on November 12, 2014 Affirmed Aa1 (sf)
U.S. $66,000,000 Class A-2 Second
Priority Senior Secured Floating Rate Notes due January 2034, Upgraded
to Aa2 (sf); previously on November 12, 2014 Upgraded to Aa3
(sf)
Alesco Preferred Funding II, Ltd., issued in December
2003, is a collateralized debt obligation backed by a portfolio
of bank trust preferred securities (TruPS).
RATINGS RATIONALE
The rating actions are primarily a result of the deleveraging of the Class
A-1 notes, an increase in the transaction's over-collateralization
ratios and the improvement in the credit quality of the underlying portfolio
since the last rating action in November 2014.
The Class A-1 notes have paid down by approximately 13.3%
or $6.7 million since November 2014, using principal
proceeds from the redemption of the underlying assets and the diversion
of excess interest proceeds. The Class A-1 notes'
par coverage has thus improved to 471.2% from 418.4%
since November 2014, by Moody's calculations. Based
on the trustee's May 2015 report, the over-collateralization
ratio of the Class A notes was 188.1% (limit 130.0%),
versus 170.5% in October 2014, and that of the Class
B notes, 94.6% (limit 101.7%),
versus 88.9% in October 2014. The Class A-1
notes will continue to benefit from the diversion of excess interest and
the use of proceeds from redemptions of any assets in the collateral pool.
The deal has also benefited from improvement in the credit quality of
the underlying portfolio. According to Moody's calculations,
the weighted average rating factor (WARF) improved to 684 from 783 in
November 2014. Since November 2014, one assets with a total
par of $5.0 million have redeemed at par.
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
$206 million, defaulted/deferring par of $17 million,
a weighted average default probability of 6.81% (implying
a WARF of 684), and a weighted average recovery rate upon default
of 10%. 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.
Methodology Underlying the Rating Action
The principal methodology used in this rating was "Moody's Approach to
Rating TruPS CDOs," published on June 2014. Please see the
Credit Policy 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
estimation uncertainty.
Loss and Cash Flow Analysis:
Moody's applied a Monte Carlo simulation framework in Moody's
CDOROM™ v.2.15-1 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™ v. 2.15-1 is
available on www.moodys.com under Products and Solutions
-- Analytical models, upon receipt of a signed free
license agreement.
The portfolio of this CDO contains mainly 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 FDIC Q4-2014 financial data.
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 457)
Class A-1: 0
Class A-2: +1
Class B-1: +2
Class B-2: +2
Assuming a two-notch downgrade to assets with below-investment
grade ratings or rating estimates (WARF of 1030)
Class A-1: -1
Class A-2: -1
Class B-1: -1
Class B-2: -1
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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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.
Haoning Ding
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
Paul Buttress
Senior Vice President/Manager
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
Moody's upgrades the ratings on $110 million of TruPS CDO notes issued by Alesco Preferred Funding II, Limited
