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Related Issuers
Rating Action:

Moody's upgrades the ratings on $299.4 million of TruPS CDO notes issued by Kodiak CDO II, Ltd.

26 Jan 2015

New York, January 26, 2015 -- Moody's Investors Service, ("Moody's") has upgraded the ratings on the following notes issued by Kodiak CDO II, Ltd.:

U.S. $338,000,000 Class A-1 Senior Secured Floating Rate Notes Due 2042 (current balance of $166,372,185), Upgraded to Ba3 (sf); previously on January 31, 2014 Upgraded to B1 (sf)

U.S. $53,000,000 Class A-2 Senior Secured Floating Rate Notes Due 2042, Upgraded to B1 (sf); previously on January 31, 2014 Upgraded to Caa1 (sf)

U.S. $80,000,000 Class A-3 Senior Secured Floating Rate Notes Due 2042, Upgraded to Caa1 (sf); previously on January 31, 2014 Upgraded to Caa2 (sf)

Kodiak CDO II, Ltd., issued in June 2007, is a collateralized debt obligation backed by a portfolio of insurance and REIT trust preferred securities (TruPS) and CMBS securities.

RATINGS RATIONALE

The rating actions are primarily a result of the deleveraging of the Class A-1 notes and an increase in the transaction's over-collateralization (OC) ratios since January 2014.

The Class A-1 notes have paid down by approximately 12.5% or $23.8 million since March 2014 , using the diversion of excess interest proceeds due to Class A/B overcollateralization test failure . The Class A-1 notes' par coverage has thus improved to 267.8%, by Moody's calculations. Based on the trustee's December 2014 report, the over-collateralization ratio of the Class A/B , C, D, E and F were 113.4%, 101.7%, 93.0%, 85.4% and 76.6%, respectively, compared to March 2014 levels of 110.9%, 110.2% 92.1%, 85.1% and 76.9%,respectively. 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 4404 from 4748 in January 2014. The total par amount that Moody's treated as having defaulted or deferring declined to $96.7 million from $146.0 million in January 2014.

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 and principal proceeds balance (after treating deferring securities as performing if they meet certain criteria) of $445.7 million, defaulted/deferring par of $96.7 million, a weighted average default probability of 58.48% (implying a WARF of 4404), and a weighted average recovery rate upon default of 13.65%. 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 in 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 maintains its stable outlook on the US insurance 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.

5) Long-dated assets: The presence of assets that mature after the TruPS CDO's legal maturity date exposes the deal to liquidation risk on those assets. This risk is borne first by investors with the lowest priority in the capital structure. Moody's assumes that the terminal value of an asset upon liquidation at maturity will be equal to the assumed liquidation value.

Loss and Cash Flow Analysis:

Moody's applied a Monte Carlo simulation framework in Moody's CDOROM™ v.2.14.1 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. 2.14.1 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 TruPS issued by small to medium sized U.S. REIT and insurance companies that Moody's does not rate publicly. To evaluate the credit quality REIT TruPS that do not have public ratings, Moody's REIT group assesses their credit quality using the REIT firms' annual financials. For insurance TruPS that do not have public ratings, Moody's relies on the assessment of its Insurance team, based on the credit analysis of the underlying insurance firms' annual statutory financial reports.

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 2615)

Class A-1: +2

Class A-2: +3

Class A-3: +3

Class B-1: +4

Class B-2: +4

Assuming a two-notch downgrade to assets with below-investment grade ratings or rating estimates (WARF of 5392)

Class A-1: -1

Class A-2: -4

Class A-3: -4

Class B-1: 0

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 did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

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.

Xixian Feng
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
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 $299.4 million of TruPS CDO notes issued by Kodiak CDO II, Ltd.
No Related Data.
© 2021 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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