New York, November 16, 2012 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Integral Funding Ltd.:
U.S. 72,000,000 Class B Deferrable Floating Rate Notes Due September 27, 2017, Upgraded to Aaa (sf); previously on September 22, 2011 Upgraded to A1 (sf);
U.S. 42,000,000 Class C Deferrable Floating Rate Notes Due September 27, 2017, Upgraded to A1 (sf); previously on September 22, 2011 Upgraded to Ba1 (sf);
U.S. 46,000,000 Class D Deferrable Floating Rate Notes Due September 27, 2017, Upgraded to Ba3 (sf); previously on September 22, 2011 Upgraded to B3 (sf).
According to Moody's, the rating actions taken on the notes are primarily a result of deleveraging of the senior notes and an increase in the transaction's overcollateralization ratios since the rating action in September 2011. Moody's notes that the Class A-1 Notes have been paid down in full, by approximately $145 million since the last rating action. In addition, the Class A-2 Notes have paid down by approximately 62% or $142.9 million since the last rating action. Based on the latest trustee report dated October 3, 2012, the Class A, Class B, and Class C overcollateralization ratios are reported at 193.6%, 142.9%, and 124.0% respectively, versus the August 2011 levels of 145.2%, 124.5%, 115.0%, respectively. Moody's notes that the trustee reported overcollateralization ratios as of October 3, 2012 do not reflect the distributions made on the October 15 payment date. In addition to the deleveraging and increased collateral coverage, the Weighted Average Spread ("WAS") has increased to 3.44% from 2.99% based on the same trustee reports.
Additionally, Moody's notes that the underlying portfolio includes a number of investments in securities that mature after the maturity date of the notes. Based on Moody's analysis, securities that mature after the maturity date of the notes currently make up approximately 5.37% of the underlying portfolio. These investments potentially expose the notes to market risk in the event of liquidation at the time of the notes' maturity.
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, weighted average spread, 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 $322 million, defaulted par of $28.5 million, a weighted average default probability of 16.14% (implying a WARF of 2726), a weighted average recovery rate upon default of 49.44%, and a diversity score of 41. 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.
Integral Funding Ltd, issued in September 2007, is a collateralized loan obligation backed primarily by a portfolio of senior secured loans.
The principal methodology used in this rating was "Moody's Approach to Rating Collateralized Loan Obligations" published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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% (2181)
Class A-2: 0 Class A-3: 0 Class B: 0 Class C: +2 Class D: +1 Moody's Adjusted WARF + 20% (3271)
Class A-2: 0 Class A-3: 0 Class B: 0 Class C: -3 Class D: -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 upcoming speculative-grade debt maturities 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 continue 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.
3) Long-dated assets: The presence of assets that mature beyond the CLO's legal maturity date exposes the deal to liquidation risk on those assets. Moody's assumes an asset's terminal value upon liquidation at maturity to be equal to the lower of an assumed liquidation value (depending on the extent to which the asset's maturity lags that of the liabilities) and the asset's current market value.
4) Weighted average life: The notes' ratings are sensitive to the weighted average life assumption of the portfolio, which may be extended due to the manager's decision to reinvest into new issue loans or other loans with longer maturities and/or participate in amend-to-extend offerings.
Further information on Moody's analysis of this transaction is available on www.moodys.com.
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Ainat Koller Analyst Structured Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Ramon O. Torres Senior Vice President 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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