Moody's upgrades the ratings of CLO notes issued by Centurion CDO 9 Limited
New York, June 20, 2012 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Centurion CDO 9 Limited :
U.S.$35,000,000 Class A-2 Floating Rate Notes Due July 17, 2019, Upgraded to Aa2 (sf); previously on August 19, 2011 Upgraded to Aa3 (sf);
U.S.$38,000,000 Class B Floating Rate Notes Due July 17, 2019, Upgraded to A3 (sf); previously on August 19, 2011 Upgraded to Baa1 (sf);
U.S.$9,500,000 Class D-1 Floating Rate Notes Due July 17, 2019, Upgraded to B1 (sf); previously on August 19, 2011 Upgraded to B2 (sf);
U.S.$4,000,000 Class D-2 Fixed Rate Notes Due July 17, 2019, Upgraded to B1 (sf); previously on August 19, 2011 Upgraded to B2 (sf);
U.S.$5,000,000 Class Q-2 Combination Securities Due July 17, 2019 (current rated balance of $2,535,732), Upgraded to Aa3 (sf); previously on August 19, 2011 Upgraded to A1 (sf).
According to Moody's, the rating actions taken on the notes reflect the benefit of the short period of time remaining before the end of the deal's reinvestment period in July 2012. In consideration of the reinvestment restrictions applicable during the amortization period, and therefore limited ability to effect significant changes to the current collateral pool, Moody's analyzed the deal assuming a higher likelihood that the collateral pool characteristics will continue to maintain a positive "cushion" relative to certain covenant requirements. In particular, the deal is assumed to benefit from higher weighted average spread and weighted average recovery rate levels than in the last rating analysis. Additionally, the overcollateralization ratios of the rated notes have improved since the last rating action in August 2011. The Class A, Class B, Class C and Class D overcollateralization ratios are reported at 122.5%, 115.8%, 107.4% and 105.5%, respectively, versus July 2011 levels of 121.7%, 115.1%, 106.7% and 104.8%, respectively, and all related overcollateralization tests are currently in compliance.
Due to the impact of revised and updated key assumptions referenced in "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011, key model inputs used by Moody's in its analysis, such as par, weighted average rating factor, diversity score, and weighted average recovery rate, may be different from the trustee's reported numbers. In its base case, Moody's analyzed the underlying collateral pool to have a performing par and principal proceeds balance of $808 million, defaulted par of $6.4 million, a weighted average default probability of 20.19% (implying a WARF of 2809), a weighted average recovery rate upon default of 49.61%, and a diversity score of 79. The default and recovery properties of the collateral pool are incorporated in cash flow model analysis where they are subject to stresses as a function of the target rating of each CLO liability being reviewed. The default probability is derived from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The average recovery rate to be realized on future defaults is based primarily on the seniority of the assets in the collateral pool. In each case, historical and market performance trends and collateral manager latitude for trading the collateral are also factors.
Centurion CDO 9 Limited, issued in June 2005, is a collateralized loan obligation backed primarily by a portfolio of senior secured loans.
The methodologies used in this rating were "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011, and "Using the Structured Note Methodology to Rate CDO Combo-Notes" published in February 2004. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Moody's modeled the transaction using a cash flow model based on the Binomial Expansion Technique, as described in Section 2.3 of the "Moody's Approach to Rating Collateralized Loan Obligations" rating methodology published in June 2011.
In addition to the base case analysis described above, Moody's also performed sensitivity analyses to test the impact on all rated notes of various default probabilities. Below is a summary of the impact of different default probabilities (expressed in terms of WARF levels) on all rated notes (shown in terms of the number of notches' difference versus the current model output, where a positive difference corresponds to lower expected loss), assuming that all other factors are held equal:
Moody's Adjusted WARF -- 20% (2247)
Class A1-A: 0 Class A1-B: 0 Class A-2: +1 Class B: +3 Class C: +1 Class D-1: +2 Class D-2: +1 Class Q-2: +2 Moody's Adjusted WARF + 20% (3371)
Class A1-A: -1 Class A1-B: -1 Class A-2: -3 Class B: -2 Class C: -1 Class D-1: 0 Class D-2: -1 Class Q-2: -2 Moody's notes that this transaction is subject to a high level of macroeconomic uncertainty, as evidenced by 1) uncertainties of credit conditions in the general economy and 2) the large concentration of speculative-grade debt maturing between 2014 and 2016 which may create challenges for issuers to refinance. CLO notes' performance may also be impacted by 1) the manager's investment strategy and behavior and 2) divergence in legal interpretation of CLO documentation by different transactional parties due to embedded ambiguities.
Sources of additional performance uncertainties are described below:
1) Deleveraging: The main source of uncertainty in this transaction is whether deleveraging from unscheduled principal proceeds will commence after the end of reinvestment period in July 2012 and at what pace. Deleveraging may accelerate due to high prepayment levels in the loan market and/or collateral sales by the manager, which may have significant impact on the notes' ratings.
2) Recovery of defaulted assets: Market value fluctuations in defaulted assets reported by the trustee and those assumed to be defaulted by Moody's may create volatility in the deal's overcollateralization levels. Further, the timing of recoveries and the manager's decision to work out versus sell defaulted assets create additional uncertainties. Moody's analyzed defaulted recoveries assuming the lower of the market price and the recovery rate in order to account for potential volatility in market prices.
Further information on Moody's analysis of this transaction is available on www.moodys.com.
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Haoning Ding Associate Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Min Xu Vice President - Senior Analyst Structured Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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