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July 2009
In this issue
 
Fundamental View: Loan Refinancing Opportunities Offer BorrowersModest Short-Term Relief, Better Prospects in 2010-2011
We expect a slow economic recovery. What are the implications for speculative-grade issuers and CLOs?
 See page 2
 
Fundamental View: Is the Liquidity Crisis Beginning to Recede forSpeculative-Grade Issuers?
There are signs that market liquidity is improving. We explore what those signsare and their implications for CLOs.
 See page 3
 
The Market Pulse
Key indices for June show signs of improvement. Could this be an indication thata recovery is underway?
 See page 4
 
Questions Raised by Discount Repurchases of CLO Tranches
Some managers are interested in repurchasing CLO tranches. We discuss somequestions 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 conceptof 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
The sweep continues with further downgrades. Here are the details.
 See page 9
 
“Tax Blocker” CLO Subsidiaries Raise Concerns
Some CLOs are setting up tax subsidiaries to hold certain equity securitiesreceived in restructurings. What are some of our concerns?
 See page 11
 
Events, Announcements, Publications
 We list recent events, announcements, and publications.
 See page 12
Contact Us
LEAD EDITOR: Algis RemezaFAX: +1 (212) 298-6875E-MAIL:CLOInterest@moodys.comwww.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
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 
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 
Contributors
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 
 
Moody’s Views on the Global CLO Market
 
 
2
July 2009
Moody’s CLO Interest
Moody’s CLO Interest
The Fundamental View
Loan Refinancing Opportunities Offer Borrowers ModestShort-Term Relief, Better Prospects in 2010-2011
Following the disastrous quarters of Q4 2008 and Q1 2009, many companies and their lenders are hoping thatthe economic bottom has been reached. Though few expect a rapid rebound, the hope is that — following aperiod of stabilization — a recovery will follow, though it may not gain momentum until 2011 and will likely beweaker than past recoveries. This expectation of stabilization and eventual recovery, along with a desire bymany banks to limit the scope of debt write-downs, is behind a number of debt-restructuring proposals thatMoody’s has seen. In essence, these restructuring proposals aim to provide the companies with enoughliquidity to help them survive until an economic recovery restores free cash flow and other credit metrics tosustainable levels. Of course, should the economy not recover as hoped, this may in some cases set the stagefor a further round of defaults in 2011; at the same time as a pick-up in the volume of speculative grade debtmaturities.According to Moody’s June Monthly Default Report, the European 12-month Speculative-Grade default rateincreased to 5.6% in Q2 2009, up modestly from 4.5% in Q1, but more sharply from 0.7% in Q2 2008. Moody’sexpects the rate to climb further to a peak of around 15% in Q4 2009, before easing to about 12.5% aroundthe 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. defaultrates has led that in Europe, the subsequent decline is expected to occur earlier in the U.S.— Moody’sforecasts 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 anumber of highly leveraged companies that are in restructuring discussions, or facing liquidity issues as aconsequence of the economic downturn. The relatively slow reduction in the default rate outside the U.S. is inline with Moody’s current global economic scenario, which envisages a gradual and painful economic “hook-shaped” recovery.
1
 A recent notable feature of the capital markets has been an increase in the level of bond issuance and anarrowing of spreads, particularly for investment-grade companies. New issue volume for 2009 has outpaced2008 and for US and Canada has reached about $82B. Most likely because of the large number of single-Bcompanies that need to refinance, single-B issuance has accounted for the bulk of the activity. Spreads havecome in from their post-Lehman-bankruptcy peaks, but interest expense for firms seeking to refinance isgenerally 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. Fora number of highly leveraged European companies, there will be increasing pressure on cash flow due toamortization of Term Loan A facilities. For the time being at least, it appears that most such companies will notbe 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 economicenvironment 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 tostabilize.
❖
 
Chetan Modi Christina Padgett Vice President – Senior Credit Officer Senior Vice President +44 (20) 7772-5451 +1 (212) 553-4164 
1
See “On the Hook - Update on Moody's Global Macroeconomic Risk Scenarios 2009-2010,” May 2009.
 
 
3
July 2009
Moody’s CLO Interest
Moody’s CLO Interest
The Fundamental View
Is the Liquidity Crisis Beginning to Recede forSpeculative-Grade Issuers?
The liquidity crisis may be showing some signs of improvement if the recent performance of Moody’sSpeculative Grade Liquidity Ratings (“SGL Ratings”) is any indication. A SGL Rating is Moody’s opinion of anissuer's relative ability to generate cash from internal resources, as well as the availability of external sourcesof committed financing, in relation to the issuer’s cash obligations over the following year. SGL ratings aredenoted by a scale ranging from SGL-1 (very good liquidity) to SGL-4. Issuers rated SGL-4 have weakliquidity because they rely on uncommitted external sources of financing which, in Moody's opinion, may notbe available when needed.In June according to“Moody’s SGL Monitor: Speculative-Grade Liquidity”(July 2009), Moody’s Liquidity-Stress Index, which measures the number of SGL-4-rated companies as a percentage of all SGL-ratedcompanies, fell to 17.1%, down from a six-year peak of 20.9% in March. This marks the third consecutivemonthly decrease and the first quarterly decrease of the Liquidity-Stress Index in two years. It is a possiblesign 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 underlyingCLOs may face refinancing risk. Thus, they may be less likely to default on their debt obligations. This isworth 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. Thissuggests that in the current economic environment, defaults by speculative-grade issuers are more likely tooccur because of lack of liquidity and an inability to refinance.Despite the signs of improvements described above, however, liquidity concerns will likely persist for sometime. Consumer demand and corporate revenues show continuing weakness, leaving many companiesstarved of retained earnings needed to finance their activities. Additionally, many underlying issuers will needto refinance their debt in the 2012-2014 period. Any that rely on uncommitted external financing at that timewill face ongoing liquidity pressures. Hence, liquidity will remain a key credit consideration for speculative-grade issuers and CLOs that invest in their obligations.
❖
 
Arnaud Lasseron Vice President - Senior Analyst +1 (212) 553-7742 
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