New York, May 11, 2015 -- Moody's Investors Service has upgraded the ratings on the following notes
issued by Preferred Term Securities XXVI, Ltd. and PreTSL
Combination Series P XXVI Trust:
Issuer: Preferred Term Securities XXVI, Ltd.
U.S. $530,250,000 Floating Rate Class
A-1 Senior Notes Due September 22, 2037 (current balance
of $332,019,785), Upgraded to Aa3 (sf);
previously on July 25, 2014 Affirmed A1 (sf)
U.S. $140,250,000 Floating Rate Class
A-2 Senior Notes Due September 22, 2037 (current balance
of $136,897,227), Upgraded to A3 (sf); previously
on July 25, 2014 Upgraded to Baa1 (sf)
U.S. $59,900,000 Floating Rate Class
B-1 Mezzanine Notes Due September 22, 2037 (current balance
of $58,468,049) Upgraded to Ba3 (sf); previously
on July 25, 2014 Upgraded to B3 (sf)
U.S. $37,500,000 Fixed/Floating Rate
Class B-2 Mezzanine Notes Due September 22, 2037 (current
balance of $36,603,537) Upgraded to Ba3 (sf);
previously on July 25, 2014 Upgraded to B3 (sf)
U.S. $71,500,000 Floating Rate Class
C-1 Mezzanine Notes Due September 22, 2037 (current balance
including interest shortfall of $76,425,470) Upgraded
to Caa3 (sf); previously on June 6, 2013 Affirmed C (sf)
U.S. $39,500,000 Fixed/Floating Rate
Class C-2 Mezzanine Notes Due September 22, 2037 (current
balance including interest shortfall of $50,303,535)
Upgraded to Caa3 (sf); previously on June 6, 2013 Affirmed
C (sf)
Issuer: PreTSL Combination Series P XXVI Trust
PreTSL U.S. $500,000 Combination Series P XXVI-1
Certificates Due September 22, 2037 (current rated balance of $355,386),
Upgraded to Aa1 (sf); previously on July 25, 2014 Confirmed
at Aa3 (sf)
Preferred Term Securities XXVI, Ltd., issued in June
2007, is a collateralized debt obligation backed by a portfolio
of bank and insurance 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, resumption of interest payments of previously deferring
assets, recoveries on a defaulted asset and the improvement in the
credit quality of the underlying portfolio since July 2014.
The Class A-1 notes have paid down by approximately 2.6%
or $8.9 million since July 2014, using recoveries
and the diversion of excess interest proceeds. The deal received
recovery proceeds of $6.6 million, or 44.2%
of par, from one defaulted asset. In addition, three
previously deferring banks, with a total par of $34.0
million, have resumed interest payments on their trust preferred
securities. One of the deferring banks, with a par of $20.5
million, was assumed defaulted in our last review in July 2014 because
its financial ratios did not meet certain criteria. As a result,
the Class A-1 notes' par coverage has thus improved to 194.7%
from 183.6% since July 2014, by Moody's calculations.
Based on the trustee's March 2015 report, the over-collateralization
ratio of the Class A, Class B, and Class C notes are 138.0%,
114.7%, 93.7% and 84.8%,
respectively compared to June 2014 levels 136.5%,
113.3%, 92.9% and 84.3%,
respectively.
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 975 from 1112 in
July 2014. The total par amount that Moody's treated as having
defaulted or deferring declined to $197.0 million from $232.5
million in July 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 (after
treating deferring securities as performing if they meet certain criteria)
of $646.3 million, defaulted/deferring par of $197.0
million, a weighted average default probability of 10.66%
(implying a WARF of 975), 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 these ratings 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 has a stable outlook on the US banking sector. 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) Resumption of interest payments by deferring assets: A number
of banks have resumed making interest payments on their TruPS.
The timing and amount of deferral cures could have significant positive
impact on the transaction's over-collateralization ratios and the
ratings on the notes.
5) 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.
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 mainly TruPS issued by small to medium
sized U.S. community banks and insurance companies 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.
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 665)
Class A-1: +1
Class A-2: +1
Class B-1: +2
Class B-2: +2
Class C-1: +2
Class C-2: +2
Series P XXVI-1: 0
Assuming a two-notch downgrade to assets with below-investment
grade ratings or rating estimates (WARF of 1542)
Class A-1: -1
Class A-2: -2
Class B-1: -2
Class B-2: -2
Class C-1: -1
Class C-2: -1
Series P XXVI-1: 0
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 these transactions
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/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 $691.1 million of TruPS CDO notes issued by Preferred Term Securities XXVI, Ltd. and PreTSL Combination Series P XXVI Trust
