Moody's also affirms the rating on $47.2 million of notes
New York, March 05, 2019 -- Moody's Investors Service ("Moody's") has upgraded the
ratings on the following notes issued by Kodiak CDO II, Ltd.:
U.S.$80,000,000 Class A-3 Senior
Secured Floating Rate Notes Due 2042, Upgraded to Aa2 (sf);
previously on August 17, 2018 Upgraded to Aa3 (sf)
U.S.$81,000,000 Class B-1 Senior
Secured Floating Rate Notes Due 2042, Upgraded to Ba3 (sf);
previously on August 17, 2018 Upgraded to B1 (sf)
U.S.$5,000,000 Class B-2 Senior
Secured Fixed/Floating Rate Notes Due 2042, Upgraded to Ba3 (sf);
previously on August 17, 2018 Upgraded to B1 (sf)
Moody's also affirmed the rating on the following notes:
U.S.$53,000,000 Class A-2 Senior
Secured Floating Rate Notes Due 2042 (current balance of 47,231,865),
Affirmed Aa1 (sf); previously on August 17, 2018 Upgraded to
Aa1 (sf)
Kodiak CDO II, Ltd., issued in June 2007, is
a collateralized debt obligation (CDO) backed mainly by a portfolio of
REIT trust preferred securities (TruPS), with exposure to bank TruPS,
insurance notes, corporate bonds and structured finance securities.
RATINGS RATIONALE
The rating actions are primarily a result of the deleveraging of the Class
A-1 and Class A-2 notes, an increase in the transaction's
over-collateralization (OC) ratios, and the improvement in
the credit quality of the underlying portfolio since August 2018.
The Class A-1 notes have paid in full and the Class A-2
notes have paid down by approximately 10.9% or $5.8
million since August 2018, using principal proceeds from the redemption
of the underlying assets and the diversion of excess interest proceeds.
Based on Moody's calculations, the OC ratios for the Class
A-2, Class A-3 and Class B notes have improved to
645.6%, 239.7% and 143.0%,
respectively, from August 2018 levels of 529.9%,
225.0% and 139.0%, respectively.
The Class A-2 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 3341 from 3548 in
August 2018.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings 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.
The Credit Ratings on the notes issued by Kodiak CDO II, Ltd.
were assigned in accordance with Moody's existing Methodology entitled
"Moody's Approach to Rating TruPS CDOs" dated October 7, 2016.
Please note that on November 14, 2018, Moody's released a
Request for Comment, in which it has requested market feedback on
potential revisions to its Methodology for TruPS CDOs. If the revised
Methodology is implemented as proposed, we do not expect the changes
to affect the Credit Ratings on notes issued by Kodiak CDO II, Ltd..
Please refer to Moody's Request for Comment, titled "Proposed Update
to Moody's Approach to Rating TruPS CDOs" for further details regarding
the implications of the proposed Methodology revisions on certain Credit
Ratings.
Factors that Would Lead to an Upgrade or Downgrade of the Ratings:
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.
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.
Moody's obtained a loss distribution for this CDO's portfolio by simulating
defaults using Moody's CDOROM™, which used Moody's assumptions
for asset correlations and fixed recoveries in a Monte Carlo simulation
framework. Moody's then used the resulting loss distribution,
together with structural features of the CDO, as an input in its
CDOEdge™ cash flow model.
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 as having a performing par of
$304.9 million, defaulted par of $79.2
million, a weighted average default probability of 48.03%
(implying a WARF of 3341), and a weighted average recovery rate
upon default of 13.6%.
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 mainly TruPS issued by REIT companies
that Moody's does not rate publicly. To evaluate the credit
quality of REIT TruPS that do not have public ratings, Moody's
REIT group assesses their credit quality using the REIT firms' annual
financials.
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.
The analysis relies on an assessment of collateral characteristics to
determine the collateral loss distribution, that is, the function
that correlates to an assumption about the likelihood of occurrence to
each level of possible losses in the collateral. As a second step,
Moody's evaluates each possible collateral loss scenario using a
model that replicates the relevant structural features to derive payments
and therefore the ultimate potential losses for each rated instrument.
The loss a rated instrument incurs in each collateral loss scenario,
weighted by assumptions about the likelihood of events in that scenario
occurring, results in the expected loss of the rated instrument.
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.
Haoning Ding
Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Oktay Veliev
VP - Senior Credit Officer
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
