New York, November 09, 2012 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Fraser Sullivan CLO II Ltd.:
U.S. $33,000,000 Class B Senior Secured Floating Rate Notes due 2020, Upgraded to Aaa (sf); previously on August 23, 2011 Upgraded to Aa1 (sf);
U.S. $32,000,000 Class C Senior Secured Deferrable Floating Rate Notes due 2020, Upgraded to A1 (sf); previously on August 23, 2011 Upgraded to A2 (sf);
U.S. $33,000,000 Class D Senior Secured Deferrable Floating Rate Notes due 2020, Upgraded to Baa3 (sf); previously on August 23, 2011 Upgraded to Ba1 (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 December 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 buffer relative to certain covenant requirements. In particular, the deal is assumed to benefit from higher spread levels and higher diversity score compared to the levels assumed at the last rating action in August 2011. Moody's modeled a WAS of 3.8% compared to 3.0% and a diversity score of 61 compared to 54 at the time of the last rating action. Moody's also notes that the transaction's reported overcollateralization ratios are stable since the last rating action.
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 $471.6 million, defaulted par of $14.3 million, a weighted average default probability of 18.49% (implying a WARF of 2724), a weighted average recovery rate upon default of 48.6%, and a diversity score of 61. 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.
Fraser Sullivan CLO II Ltd., issued in December 2006, 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% (2179)
Class A-1a: 0 Class A-1b: 0 Class A-2: 0 Class B: 0 Class C: +2 Class D: +2 Class E: +1 Moody's Adjusted WARF + 20% (3269)
Class A-1a: 0 Class A-1b: 0 Class A-2: 0 Class B: -1 Class C: -2 Class D: -1 Class E: -1 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 commence 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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Shan Lai 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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