Rating Action: Moody's assigns provisional ratings to three classes of notes to be issued by TruPS Financials Note Securitization 2020-1
Global Credit Research - 14 Jul 2020
New York, July 14, 2020 -- Moody's Investors Service ("Moody's") has assigned provisional ratings to three classes of notes to be issued by TruPS Financials Note Securitization 2020-1 (the "Issuer" or "TFINS 2020-1").
Moody's rating action is as follows:
U.S.$169,700,000 Class A-1 Senior Secured Fixed/Floating Rate Notes due 2040 (the "Class A-1 Notes"), Assigned (P)Aa2 (sf)
U.S.$19,800,000 Class A-2 Mezzanine Deferrable Fixed/Floating Rate Notes due 2040 (the "Class A-2 Notes"), Assigned (P)A3 (sf)
U.S.$22,700,000 Class B Mezzanine Deferrable Fixed/Floating Rate Notes due 2040 (the "Class B Notes"), Assigned (P)Baa3 (sf)
The Class A-1 Notes, the Class A-2 Notes, and the Class B Notes are referred to herein, collectively, as the "Rated Notes."
RATINGS RATIONALE
The rationale for the ratings is based on our methodology and considers all relevant risks, particularly those associated with the CDO's portfolio and structure.
TFINS 2020-1 is a static cash flow CDO. The issued notes will be collateralized primarily by a portfolio of (1) trust preferred securities ("TruPS") and subordinated notes issued by US community banks and their holding companies and (2) TruPS and surplus notes issued by insurance companies and their holding companies. We expect the portfolio to be 100% ramped as of the closing date.
EJF CDO Manager LLC (the "Manager"), an affiliate of EJF Capital LLC, will direct the selection, acquisition and disposition of the assets on behalf of the Issuer. The Manager will direct the disposition of any defaulted securities, credit risk securities, or certain securities whose issuer has been acquired, or has acquired or merged with another institution ("APAI securities"). Subject to certain reinvestment criteria, the Manager may reinvest proceeds from sales of APAI securities.
In addition to the Rated Notes, the Issuer will issue preferred shares.
The transaction incorporates interest and par coverage tests which, if triggered, divert interest and principal proceeds to pay down the notes in order of seniority.
The portfolio of this CDO consists of (1) TruPS, senior notes and surbordinated debts issued by 45 US community banks and (2) TruPS, senior notes, subordinated notes and surplus notes issued by 19 insurance companies, the majority of which Moody's does not rate. Moody's assesses the default probability of bank obligors that do not have public ratings through credit scores derived using RiskCalc(TM), an econometric model developed by Moody's Analytics. Moody's evaluation of the credit risk of the bank obligors in the pool relies on FDIC Q1-2020 financial data. Moody's assesses the default probability of insurance company obligors that do not have public ratings through credit assessments provided by its insurance ratings team based on the credit analysis of the underlying insurance companies' annual statutory financial reports. Moody's assumes a fixed recovery rate of 10% for both the bank and insurance obligations.
For modeling purposes, Moody's used the following base-case assumptions:
Par amount: $282,925,000
Weighted Average Rating Factor (WARF) : 1150
Weighted Average Spread (WAS) Float Only: 3.54%
Weighted Average Coupon (WAC) Fixed Only: 6.56%
Weighted Average Spread (WAS) Fixed to Float: 3.95%
Weighted Average Spread (WAC) Fixed to Float: 6.00%
Weighted Average Life (WAL): 9.94 years
In addition to the quantitative factors that Moody's explicitly models, qualitative factors were part of the rating committee consideration. Moody's considers the structural protections in the transaction, the risk of an event of default, 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 transaction, influenced the final rating decision.
The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of bank and insurance assets from the collapse in United States economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Approach to Rating TruPS CDOs" published in June 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1183156. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Factors That Would Lead to an Upgrade or Downgrade of the Ratings:
The performance of the Rated Notes is subject to uncertainty. The performance of the Rated Notes is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The portfolio consists primarily of unrated assets whose default probability Moody's assesses through credit scores derived using RiskCalc(TM) or credit assessments. Because these are not public ratings, they are subject to additional estimation uncertainty.
Moody's obtained a loss distribution for this CDO's portfolio by simulating defaults using Moody's CDOROM(TM), which used Moody's assumptions for asset correlations and fixed recoveries in a Monte Carlo simulation framework. Moody's then used the resulting loss distribution, together with structural features of the CDO, as an input in its CDOEdge (TM) cash flow model.
Further details regarding Moody's analysis of this transaction may be found in the related pre-sale report, available on Moodys.com.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1223822.
The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.
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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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 Asst Vice President - Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Jian Hu MD - Structured Finance Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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