Moodys Clo Interest_july 2009

Moody’s Views on the Global CLO Market July 2009

Contact Us LEAD EDITOR: Algis Remeza FAX: +1 (212) 298-6875 E-MAIL: [email protected] www.moodys.com

Authors Craig Gottesman Associate Analyst

+1 (212) 553-7970

Ainat Koller Associate Analyst

+1 (212) 553-7843

Arnaud Lasseron VP-Sr Analyst

+1 (212) 553-7742

Stephen Lioce Sr Vice President

+1 (212) 553-4786

Chetan Modi

In this issue Fundamental View: Loan Refinancing Opportunities Offer Borrowers Modest Short-Term Relief, Better Prospects in 2010-2011 We expect a slow economic recovery. What are the implications for speculativegrade issuers and CLOs? See page 2

Fundamental View: Is the Liquidity Crisis Beginning to Recede for Speculative-Grade Issuers? There are signs that market liquidity is improving. We explore what those signs are and their implications for CLOs. See page 3

VP-Sr Credit Officer

+44 (20) 7772-5451

Danielle Nazarian Sr Vice President

+1 (212) 553-4054

Ruth Olson VP - Sr Analyst

+ 1(212) 553-4092

The Market Pulse

Ian Perrin VP-Sr Credit Officer

+44 (20) 7772-5534

Christina Padgett Sr Vice President

+1 (212) 553-4164

Abe Putney AVP - Analyst

+1 (212) 553-4736

Algis Remeza VP-Sr Credit Officer

+1 (212) 553-4362

Ramon Torres VP-Sr Credit Officer

+1 (212) 553-3738

Fei Fern Wang AVP - Analyst

+1 (212) 553-4621

Alice Yu AVP - Analyst

+1 (212) 553-4910

Key indices for June show signs of improvement. Could this be an indication that a recovery is underway? See page 4

Questions Raised by Discount Repurchases of CLO Tranches Some managers are interested in repurchasing CLO tranches. We discuss some questions the practice raises in the context of ratings. See page 6

Springing True Sale = “Springing” Ratings? For balance sheet CDOs, some U.S. issuers are trying to incorporate the concept of a “springing” true sale arising when CLO notes are purchased by third parties. What impact does such a concept have on CLO rating analysis? See page 8

CLO Surveillance Update: The Sweep Continues

Contributors

The sweep continues with further downgrades. Here are the details.

Eun Choi Managing Director

+1 (212) 553-4962

Yehudah Forster VP-Sr Analyst

+1 (212) 553-7995

Katherine Frey Group Managing Director

+44 (20) 7772-5521

Yvonne Fu Group Managing Director

+1 (212) 553-7732

Philip Grossmann Associate Analyst

+1 (212) 553-3681

Paul Kerlogue VP-Sr Credit Officer

+44 (20) 7772-8603

Oktay Veliev Analyst

+1 (212) 553-7467

Min Xu AVP-Analyst

+1 (212) 553-7228

Yuri Yoshizawa Senior Managing Director

+1 (212) 553-1939

See page 9

“Tax Blocker” CLO Subsidiaries Raise Concerns Some CLOs are setting up tax subsidiaries to hold certain equity securities received in restructurings. What are some of our concerns? See page 11

Events, Announcements, Publications We list recent events, announcements, and publications. See page 12

Moody’s CLO Interest

The Fundamental View

Loan Refinancing Opportunities Offer Borrowers Modest Short-Term Relief, Better Prospects in 2010-2011 Following the disastrous quarters of Q4 2008 and Q1 2009, many companies and their lenders are hoping that the economic bottom has been reached. Though few expect a rapid rebound, the hope is that — following a period of stabilization — a recovery will follow, though it may not gain momentum until 2011 and will likely be weaker than past recoveries. This expectation of stabilization and eventual recovery, along with a desire by many banks to limit the scope of debt write-downs, is behind a number of debt-restructuring proposals that Moody’s has seen. In essence, these restructuring proposals aim to provide the companies with enough liquidity to help them survive until an economic recovery restores free cash flow and other credit metrics to sustainable levels. Of course, should the economy not recover as hoped, this may in some cases set the stage for a further round of defaults in 2011; at the same time as a pick-up in the volume of speculative grade debt maturities. According to Moody’s June Monthly Default Report, the European 12-month Speculative-Grade default rate increased to 5.6% in Q2 2009, up modestly from 4.5% in Q1, but more sharply from 0.7% in Q2 2008. Moody’s expects the rate to climb further to a peak of around 15% in Q4 2009, before easing to about 12.5% around the middle of next year. In the U.S., the Q2 2009 Speculative-Grade default rate reached 11.0%, up from 8.0% in Q1 and 2.4% a year earlier. The peak is expected at 12.9% in Q4. Just as the increase in U.S. default rates has led that in Europe, the subsequent decline is expected to occur earlier in the U.S.— Moody’s forecasts a substantial drop in the U.S. Speculative-Grade rate to about 5% by mid-2010. The forecast of higher default rates through the end of this year is consistent with Moody’s understanding of a number of highly leveraged companies that are in restructuring discussions, or facing liquidity issues as a consequence of the economic downturn. The relatively slow reduction in the default rate outside the U.S. is in line with Moody’s current global economic scenario, which envisages a gradual and painful economic “hookshaped” recovery. 1 A recent notable feature of the capital markets has been an increase in the level of bond issuance and a narrowing of spreads, particularly for investment-grade companies. New issue volume for 2009 has outpaced 2008 and for US and Canada has reached about $82B. Most likely because of the large number of single-B companies that need to refinance, single-B issuance has accounted for the bulk of the activity. Spreads have come in from their post-Lehman-bankruptcy peaks, but interest expense for firms seeking to refinance is generally higher than their existing interest costs. Although there has been some issuance by European high-yield companies, the volume — about $8 billion — has lagged that in the US, and as yet the capital markets have not refinanced European leveraged loans. For a number of highly leveraged European companies, there will be increasing pressure on cash flow due to amortization of Term Loan A facilities. For the time being at least, it appears that most such companies will not be able to use the capital markets for refinancing as an alternative to debt restructuring. The implication for CLO performance is that the near-term outlook remains negative. The economic environment remains very weak and refinancing opportunities are few for the companies that most need them. However, Moody’s default forecasts suggest that by the middle of next year, the situation is more likely to stabilize. ❖ Chetan Modi Vice President – Senior Credit Officer +44 (20) 7772-5451

1

Christina Padgett Senior Vice President +1 (212) 553-4164

See “On the Hook - Update on Moody's Global Macroeconomic Risk Scenarios 2009-2010,” May 2009.

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July 2009

Moody’s CLO Interest

Moody’s CLO Interest

The Fundamental View

Is the Liquidity Crisis Beginning to Recede for Speculative-Grade Issuers? The liquidity crisis may be showing some signs of improvement if the recent performance of Moody’s Speculative Grade Liquidity Ratings (“SGL Ratings”) is any indication. A SGL Rating is Moody’s opinion of an issuer's relative ability to generate cash from internal resources, as well as the availability of external sources of committed financing, in relation to the issuer’s cash obligations over the following year. SGL ratings are denoted by a scale ranging from SGL-1 (very good liquidity) to SGL-4. Issuers rated SGL-4 have weak liquidity because they rely on uncommitted external sources of financing which, in Moody's opinion, may not be available when needed. In June according to “Moody’s SGL Monitor: Speculative-Grade Liquidity” (July 2009), Moody’s LiquidityStress Index, which measures the number of SGL-4-rated companies as a percentage of all SGL-rated companies, fell to 17.1%, down from a six-year peak of 20.9% in March. This marks the third consecutive monthly decrease and the first quarterly decrease of the Liquidity-Stress Index in two years. It is a possible sign that intrinsic liquidity constraints on corporate borrowers are beginning to ease. If firm liquidity is in fact improving, fewer of the speculative-grade issuers whose obligations are underlying CLOs may face refinancing risk. Thus, they may be less likely to default on their debt obligations. This is worth noting because, while the one-year default rate for SGL-4-rated issuers has historically averaged 19.6% over the period from October 2002 to present, it was 22% in December 2008 and 35% in June 2009. This suggests that in the current economic environment, defaults by speculative-grade issuers are more likely to occur because of lack of liquidity and an inability to refinance. Despite the signs of improvements described above, however, liquidity concerns will likely persist for some time. Consumer demand and corporate revenues show continuing weakness, leaving many companies starved of retained earnings needed to finance their activities. Additionally, many underlying issuers will need to refinance their debt in the 2012-2014 period. Any that rely on uncommitted external financing at that time will face ongoing liquidity pressures. Hence, liquidity will remain a key credit consideration for speculativegrade issuers and CLOs that invest in their obligations. ❖

Arnaud Lasseron Vice President - Senior Analyst +1 (212) 553-7742

3

July 2009

Moody’s CLO Interest

Moody’s CLO Interest

CLO Market Pulse Moody’s key indices 2 for the CLO market showed signs of stabilization as WARF and OC levels improved slightly, buoyed by rising loan prices. Over-collateralization levels have continued to improve. A key factor has been rising loan prices, including those for Caa-rated and defaulted instruments. Reinvestments have also modestly helped OC levels as some managers purchased assets at a discount, but avoided triggering deep-discount haircuts. While Caa-rated loans continued to default, their impact on the OC was reduced because market-value haircuts for excess Caa buckets already accounted for some of the potential losses. In the coming months, we expect to see a modest decline in the OC index, though subject to fluctuations in loan prices, as more defaults are expected to occur. Cash levels remained relatively flat in June. Improved liquidity in the corporate credit markets has augmented refinancings of, and prepayments on, CLO loan collateral. Offsetting these cash inflows, managers have been opportunistically buying. We expect cash to hover near current levels with the prepayment and buying trends continuing to offset each other.

Key Indices (month of June) Monthly Change

Level

OC 122.2%

( +0.42% )

Cash 3.09%

( +0.31% )

WARF 2873

( -14 )

Caa Bucket 9.47%

( -0.34% )

Defaults 6.49%

( +0.57% )

* Based on deals that have provided trustee reports as of July 27 for the month of June and that include such information. "Monthly Change" compares June and May averages for only such deals and, as a result, numbers may differ from the charts below, for which all available deals were used. Approximately, 89% of deals have reported.

CLO Senior OC and Cash Levels Monthly Levels Averaged Across All Moody's Rated CLOs January 2007 - May 2009 OC % 136

Cash % 9

134

8

132

7

130

6

128 5 126 4 124 3

122

2

120

1

118

0

116 Jan-07

Apr-07

Jul-07

Oct-07

Jan-08 OC

2

4

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Cash

Moody’s key indices are based on our global EMS data, using trustee reported figures for 840 Moody’s-rated CLOs. OC is a simple average over all CLO senior over-collateralization levels for tranches initially rated typically Aaa or Aa. Cash is calculated as a simple average over all CLOs of cash holdings as a percentage of notional outstanding. WARF is a simple average of weighted average rating factors over all CLO deals. Caa Bucket and Defaults are simple averages of Caa buckets and defaults as a percentage of notional of collateral outstanding over all CLOs. Note that historical averages could change over time as a result of corrections by deal trustees or Moody’s EMS or late reporting deals. July 2009

Moody’s CLO Interest

Moody’s CLO Interest

CLO Weighted Average Rating Factor and Caa and Defaulted Bucket Sizes Monthly Levels Averaged Across All Moody's Rated CLOs January 2007 - May 2009 WARF 3000

% 12

2900 10 2800 8 2700 2600

6

2500 4 2400 2 2300 2200

0 Jan-07

Apr-07

Jul-07

Oct-07 WARF

Jan-08

Apr-08 Caa Bucket

Jul-08

Oct-08

Jan-09

Apr-09

Defaults

A flattened WARF and downtrend in the Caa-Bucket indices were due in part to slowing downgrades on the underlying pools, as well as to technical reasons. As loans default, they are typically removed from the calculation of WARF and the Caa-Bucket, thereby, offsetting the effects of downgrades on non-defaulted loans. Moreover, some managers are trading out of Caa assets for higher rated loans. Defaults, however, continued to increase as Caa credits migrated to default. Conditional on credit markets’ liquidity continuing to improve, we expect WARF and Caa Bucket levels to stabilize in the short term because of generally improving economic conditions and existing Caa-rated assets defaulting, resulting in their removal from the indices. Defaults, however, will continue to increase until the expected economic recovery takes effect. CLO liability spreads have continued to narrow in June and July, although they are still much higher than last year’s levels. The Aaa CLO spread is close to 450 bps in July, compared to 600 bps in May, but it is still higher than the level of about 375 bps in October 2008. 3 This suggests that despite improvement in some of the CLO metrics, concerns about CLO performance continue to overshadow the improved sentiment toward underlying corporate credits. The narrowing of CLO liability spreads is highly correlated to the improving leverage loan market. Although the range is wide, average loan prices have returned to the 90s in the Ba category, compared to the 70s at the beginning of this year. Prices for Caa loans were in the 40s at the beginning of this year, hit a low of about 36 in late March and are currently above 60. Loan price improvement has contributed to the better OC ratios in recent months. Loan prices have become a more important within the calculation of the OC ratio as Caa and defaulted buckets have continued to rise. ❖ Craig Gottesman Associate Analyst +1 (212) 553-7970

3

Algis Remeza Vice President – Senior Credit Officer +1 (212) 553-4362

“Securitized Product Round Table”, Citigroup Global Markets, Inc., July 20, 2009

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July 2009

Moody’s CLO Interest

Fei Fern Wang Assistant Vice President - Analyst +1 (212) 553-4621

Moody’s CLO Interest

Questions Raised by Discount Repurchases of CLO Tranches Recently, a number of CLO issuers have been seeking to repurchase their CLO notes at a discount. Since CLO tranches are currently trading significantly below par, portfolio managers view the repurchases as a productive use of proceeds, allowing interested noteholders to exit from their positions while enhancing subordination for remaining investors. The repurchase strategies we have seen have been quite varied and have raised a number of questions and issues. The majority of the repurchase plans have involved senior-most tranches, although we have also seen proposals for repurchasing other classes of notes. Some repurchase plans have been structured to use principal proceeds while others rely on a combination of principal and interest proceeds. Typically, they also specify a maximum repurchase price as well as a limit on the dollar amount of the notes eligible to be repurchased. Most repurchase plans involve a supplemental indenture that provides a framework for future repurchases that could occur over time. A few are in the context of already existing provisions in the CLO indenture that allow for note repurchases. The following provides a summary of some of the questions and issues that have arisen as we’ve assessed the impact of the proposed note repurchases on CLO ratings. Sources of proceeds and portfolio quality: What are the sources of the proceeds that would be used to fund the repurchase? Would interest proceeds be used? If so, from which step in the waterfall would interest be diverted? If principal proceeds are to be used, are sale proceeds involved or would the sources be limited to prepayments and amortizations? To the extent that the manager would be permitted to rely on sale proceeds to effect a repurchase, we would be concerned about the motivations behind any particular sales and the resulting effects on the quality of the remaining portfolio. If the assets to be sold are identified, we can model their impact on the CLO; however, this is not always the case. Priority of repurchased notes: Which class or classes of notes are being repurchased? If classes other than the most senior could be repurchased, we would evaluate the impact on the ratings of the more senior classes whose priorities effectively would be lowered. 4 Intra-class payments: Would the repurchase direct proceeds to only those holders whose notes are being repurchased instead of to all the holders of a given class? We would be concerned if the repurchase reduced the amount of proceeds distributed to investors not involved in the repurchase on any given payment date. Process of repurchase: How will the repurchase be conducted? Will all of the noteholders be notified and provided the opportunity to retire their notes? Will only those holders whose notes are already available for purchase in the secondary market be approached? Will the repurchases be conducted on an arms’ length basis? We would be concerned if the repurchases occurred based upon the manager’s solicitation of individual investors in a less than transparent process. Repurchase period: Does the plan describe a single repurchase whose terms are explicitly defined? Or, is it meant to facilitate an open-ended ability to carry out multiple repurchases? We would be concerned about ongoing repurchases regardless of future CLO performance and market conditions. Noteholder consent: Is a supplemental indenture being contemplated? If so, will noteholder consent be sought? Even if noteholder consent is not required by the indenture, we may view the nature of the amendment to be material enough that we would consider providing a rating agency confirmation only if such consent is obtained.

4

6

Moody’s has seen some proposals to retire notes from classes other than the most senior using interest proceeds that would otherwise have been paid to equity investors. Because such a retirement would increase the overcollateralization levels without repaying the senior notes, we would have to run our ratings model to analyze the effect on the notes’ ratings. July 2009

Moody’s CLO Interest

Moody’s CLO Interest

Distressed exchange: Does the repurchase qualify as a distressed exchange? 5 Based upon its specific details, we will evaluate each repurchase to determine whether it meets these conditions. Given that each deal contains its own provisions and requirements, each plan is analyzed on an individual basis. The above list contains some of the potential concerns that could arise in the context of a repurchase and should be examined closely by the involved parties. ❖ Ainat Koller Associate Analyst +1 (212) 553-7843

5

7

Danielle Nazarian Senior Vice President +1 (212) 553-4054

Ian Perrin Vice President – Senior Credit Officer +44 (20) 7772-5534

Moody’s defines a distressed exchange as occurring when: 1) an issuer offers creditors a new or restructured debt, or a new package of securities, cash or assets, that amount to a diminished financial obligation relative to the original obligation and 2) the exchange has the effect of allowing the issuer to avoid a bankruptcy or payment default. July 2009

Moody’s CLO Interest

Moody’s CLO Interest

Springing True Sale = “Springing” Ratings? With the new issue CLO market essentially being used to manage bank balance sheets, true sale considerations have come to the fore. Where a traditional true sale opinion cannot be rendered at the time of transfer of the loans to a CLO, a “springing” true sale opinion asserts that once some portion of the liabilities are sold to a third party, a true sale will have been achieved. However, just as the true sale may not be realized until the CLO notes are transferred, the ratings on the CLO notes cannot reflect the true sale until it occurs. In some jurisdictions, including the U.S. (where issuers have asked Moody’s to consider the springing true sale theory), there has been a legal concern that the underlying loans in a CLO are not actually transferred or sold from a sponsor’s balance sheet to the CLO if the sponsor holds all or a material portion of the CLO liabilities and equity. Typically, balance sheet CLO issuers in the U.S. try to sell a portion of the CLO capital structure until reaching at least the minimum level at which legal counsel are willing to provide an opinion that a true sale has been achieved. However, given current market conditions, this may not always be possible. In a situation where the sponsor holds all of the CLO notes instead of the CLO selling them in the market, it could be argued that the transfer of the loans to the CLO has been just a case of transferring the assets within the same entity from one hand to the other. However, there are implications to the ratings on the CLO, which are assigned on a stand-alone basis without regard to who the CLO’s sponsor was or its noteholders may be. Until the liabilities are transferred and a true sale on the underlying loans is achieved, the ratings have to capture the risk that the assets may not be available to the CLO, or the CLO may have only a limited interest in the assets, under the scenario of the sponsor defaulting or becoming insolvent. If the sponsor files for bankruptcy, the sale of the loans to the CLO is challenged and the bankruptcy court finds there was no true sale, the loans would be viewed as part of the sponsor’s estate, never having been transferred to the CLO. In that case, the CLO will have to make a claim against the bankruptcy estate and will be at risk of sharing the value of the loan assets with the sponsor’s other creditors, which is a rating issue for the CLO notes. If the CLO took a perfected security interest in the loans as a back-up to the true sale, then the CLO will generally be entitled to have the value of the loans applied to its claim in the sponsor’s insolvency proceeding, but it will have to successfully assert the priority of its claim and wait to realize this value. In the absence of a security interest, the CLO’s claim against the sponsor will be unsecured and it will need to share with other unsecured creditors in the sponsor’s remaining assets, which will be held by the sponsor’s insolvency estate for the benefit of all its creditors. If this is the case, the CLO’s noteholders could lose their entire principal investment, especially because the CLO would have no direct claim to the underlying loans. ❖ Ruth Olson Vice President - Senior Analyst +1 (212) 553-4092

8

July 2009

Moody’s CLO Interest

Moody’s CLO Interest

CLO Surveillance Update

The Sweep Continues We recently announced the results of our second quarter 2009 CLO ratings surveillance activities, which are summarized in "CLO Ratings Surveillance Brief - Second Quarter 2009." Our rating actions during the quarter were part of the Stage II of our CLO surveillance sweep, which began in May. Most deals reviewed in the quarter were prioritized for action based on weaker-than-average performance. Specifically, certain U.S. CLOs were reviewed based on key performance metrics including portfolio WARF deterioration, OC erosion, Caa bucket increase, and structured finance exposure. During the second quarter, we downgraded 510 CLO tranches of 93 transactions totaling approximately US$33 billion. Notably, 74% of the 180 Aaa-rated tranches that were reviewed during this period were downgraded an average 3.6 notches (i.e. to between Aa3 and A1 on average). We also revised our outlook for senior CLO tranches, and now expect a majority of CLO tranches originally rated Aaa may be downgraded in the coming months. Most actions on Aaa tranches are likely to result in ratings in the Aa category, but actual actions will of course vary from deal to deal. Of the 510 downgraded tranches, 481 were from 89 U.S. CLO transactions totaling US$31 billion, with the remainder originated in Europe. Downgrades affected 132 tranches (approximately 26%) that were previously rated Aaa. Combined with rating actions taken in the first quarter, Moody's has downgraded 2,307 tranches (roughly 48% of 4,762 tranches) totaling US$82 billion globally in the first half of 2009. We note that CLO portfolios experienced significant deterioration in portfolio performance during the first half of this year, although there were signs of stabilization in key performance metrics in May and June. In particular, the average WARF increased by about 200 points from 2720 to 2918 in the first quarter before improving slightly in June. The average proportion of Caa-rated assets in the portfolios rose from around 9% in January to 12.6% in April and then declined to 11.9% in June. At the same time, defaults increased steadily from 3% in January to 6.3% in June, while OC levels stabilized somewhat in May and June after suffering a significant drop from January to April. This performance deterioration coincided with the deterioration in global corporate credit, which has seen some of its worst performance in several decades. We also observed that while CLOs overall have experienced significant deterioration, there are marked performance variations across deals. In the U.S., for example, approximately 90 CLOs identified as highpriority (called “Phase 1”) deals had an average Aa OC level of 114%. This compares to an OC level of 120% for the remaining lower-priority deals to be reviewed in the coming months. This observation is leading us to prepare for and expect potentially large variations in future portfolio performance among remaining deals.

9

July 2009

Moody’s CLO Interest

Moody’s CLO Interest

Revised CLO Rating Outlook Due to significant credit deterioration in CLOs' underlying portfolios in the first half of this year and the application of revised assumptions for CLOs (both those announced earlier this year as well as those adopted specifically during the Stage II review), Moody's now expects that a majority of senior notes, including a majority of Aaa tranches, will be downgraded during our Stage II review. Nonetheless we anticipate that Aaarated tranches from the best performing deals, as well as most super senior tranches, will remain Aaa. For the Aaa-rated tranches that may be downgraded, we expect that they will mostly fall into the Aa category. Moody's plans to conclude its global CLO surveillance sweep by the end of 2009. ❖

CLO Sweep Rating Changes (as of July 31 by tranche since March 3) 3-Mar Aaa Aa A Baa Ba B Caa Ca/C

Aaa

Aa 1,087 1 1,088

A 186 612 2 800

Baa 91 95 120 306

4 89 338 259 690

Current Rating Count Ba B Caa Ca/C WR 6 26 4 337 27 13 2 255 357 102 44 88 196 223 113 20 9 2 15 3 37 712 604 362 201

Total 7 3 2 7 4 2 3 28

1381 829 842 1024 624 33 18 40 4791

*Based on Moody’s classification of cash-flow CLOs, which include CLO-squared structures.

Ramon Torres Vice President – Senior Credit Officer +1 (212) 553-3738

10

July 2009

Moody’s CLO Interest

Moody’s CLO Interest

“Tax Blocker” CLO Subsidiaries Raise Concerns Recently, a number of CLO issuers are amending their existing Indentures to create subsidiaries to hold certain equity-like securities received from loan restructurings or work-outs of debt securities that the CLOs currently hold. Commonly called “Tax Blockers”, the proposed subsidiaries are often organized in Delaware as corporations intended to be taxable as a corporation for U.S. federal income tax purposes. These subsidiaries raise a number of issues relevant to our ratings on the CLO notes. The typical CLO Issuer is a Cayman Islands entity. It is structured to be a bankruptcy-remote special purpose vehicle primarily concerned with holding corporate loan obligations as collateral and issuing debt and equity to investors. Payments are derived from the income stream generated by the collateral pool. The Issuer is also intended to qualify under U.S. federal income tax rules that provide that an off-shore corporation will not be subject to U.S. entity level tax on its net income if its activities are deemed as not being engaged in the conduct of a U.S. trade or business. As a rule, CLO Issuers are not permitted to form subsidiaries out of concerns that should its activities and income be attributed to the CLO Issuer, it could threaten its bankruptcy-remoteness and/or its tax exempt status. Similar concerns also prohibit CLOs from acquiring as a qualifying collateral debt security any asset that may cause the Issuer to be engaged in the conduct of a U.S. trade or business for federal income tax purposes. Equity positions in other entities (such as certain partnerships, grantor trusts and limited liability companies) are typically not qualifying collateral debt securities. CLO Indentures therefore impose strict rules about the acquisition and disposition of such interests. The Tax Blocker is intended to strike a delicate balance. On the one hand, it tries to segregate in a whollyowned subsidiary the equity-like security that the CLO receives through a workout or restructuring, thus hopefully removing the harmful tax consequences to the Issuer if the asset were to remain part of the collateral pool. On the other hand, the transfer of the asset to the Tax Blocker, rather than requiring the CLO manager to outright dispose of the asset at what would currently likely be depressed prices, allows for the asset to be held so that income and gain may be realized as the asset appreciates over time. In assessing a Tax Blocker’s potential impact on the ratings of a CLO, Moody's takes into consideration various factors. These factors include, but are not limited to, the risk of CLO entity level taxation; the scope of the Tax Blocker’s permitted activities; the way in which corporate separateness, bankruptcy remoteness, and maintenance of a first priority perfected security interest in the collateral transferred to a Tax Blocker are addressed; how expenses, taxes and other liabilities incurred by the Tax Blocker are satisfied; and in what manner distributions are made by the Tax Blocker to the Issuer. ❖ Stephen Lioce Senior Vice President +1 (212) 553-4786

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July 2009

Moody’s CLO Interest

Abe Putney Assistant Vice President – Analyst +1 (212) 553-4736

Alice Yu Assistant Vice President – Analyst +1 (212) 553-4910

Moody’s CLO Interest

Announcements “Weekly Rating Action List for Global CDOs and Derivatives - Excel data” (July 27, 2009) “Weekly Rating Action List for Global CDOs and Derivatives - Excel data” (July 20. 2009) “Weekly Rating Action List for Global CDOs and Derivatives - Excel data” (July 13. 2009) “Weekly Rating Action List for Global CDOs and Derivatives - Excel data” (July 6, 2009)

Publications “Moody's Quarterly US CLO Report - Q2 2009” (July 31, 2009) “Monitoring of Japan’s SME CDOs and Rating Outlook” (July 28, 2009) “Structured Finance Ratings: Quick Check” (July 27, 2009) “Structured Finance Ratings List: Changes & Confirmations” (July 23, 2009) “CIT Impact on Cash Flow CLOs Expected to be Minimal (July 20, 2009) “CLO Ratings Surveillance Brief: Second Quarter 2009” (July 17, 2009) “Moody's Implements Changes in its Modeling Assumptions for Market-Value CLOs” (July 9, 2009) “V Scores and Parameter Sensitivities in the Global Cash Flow CLO Sector” (July 8, 2009) “Monthly Default Report – June 2009” (July 8, 2009) “Collateralized Debt Obligations Performance Overview Compilation Europe April 2009” (July 2, 2009) “Collateralized Debt Obligations Performance Overview Compilation April 2009” (July 1, 2009) “Moody's Deal Score Report CDO Deal Summary Performance April 2009” (July 1, 2009) “Moody's View on Transferring Loans Using Participations in Lieu of Assignments in CLOs” (June 23, 2009) ”Moody's CLO Interest (Newsletter) - June 2009” (June 22, 2009)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

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July 2009

Moody’s CLO Interest

Moody’s CLO Interest

About Our Organization… Moody's Derivatives Group is the leading source for credit ratings and research on collateralized loan obligations (CLOs), collateralized bond obligations (CBOs) and the entire structured derivatives market. The CDO group leverages Moody's decades of experience in Bank Loans and High Yield as well as our-market leading Default Studies to produce the most accurate rating methodologies for this asset class.

Report Number: SF174842 Editors Robert Cox, Jeremy Gluck, Algis Remeza

CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S (MIS) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. © Copyright 2009, Moody’s Investors Service, Inc., and/or its licensors and affiliates (together, "MOODY'S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”

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July 2009

Moody’s CLO Interest