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March 18, 2008 |
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BALLANTYNE RE: Moody's Lowers Ratings on US$300 Million Notes Moody's Investors Service downgraded these notes issued by Ballantyne Re plc and Orkney Re II plc: Ballantyne Re -- US$250 million of 30-year Class A-1 Floating Rate Notes -- Current Rating: Ba1, on review for downgrade -- Prior Rating: Baa3, on review for downgrade -- US$10 million of 30-year Class B-1 Subordinated Fixed Rate Notes -- Current Rating: B2, on review for downgrade -- Prior Rating: B1, on review for downgrade -- US$40 million of 30-year Class B-2 Subordinated Floating Rate Notes -- Current Rating: B2, on review for downgrade -- Prior Rating: B1, on review for downgrade Orkney Re II -- US$42.5 million of 30-year Series A-2 Floating Rate Notes -- Current Rating: Ba1, on review for downgrade -- Prior Rating: Aa2, on review for downgrade -- US$30.0 million of 30-year Series B Floating Rate Notes -- Current Rating: Ba3, on review for downgrade -- Prior Rating: Baa2, on review for downgrade Ballantyne Re and Orkney Re II are independent special purpose reinsurers each sponsored by Scottish Annuity & Life Insurance Company (Cayman) Ltd. (Ba3 insurance financial strength, on review for downgrade) for the purpose of financing the excess reserve requirement associated with distinct blocks of business ceded by Scottish Re (U.S.), Inc. (Ba3 IFS rating, on review for downgrade), a subsidiary of Scottish Re Group Limited (Scottish Re; NYSE: SCT; Caa3 preferred stock, on review for downgrade). The reinsurance agreements between Scottish Re (U.S.) and the two special purpose reinsurers covers defined blocks of level premium term life policies subject to the statutory reserve requirements of Regulation XXX. Moody's rating analysis views the actuarial assumptions in Regulation XXX as producing economically redundant statutory reserves for level premium term products. According to Moody's, the downgrades are based on both the projected losses in Ballantyne Re and Orkney Re II's investment portfolios --particularly investments in subprime and Alt-A residential mortgage-backed securities -- that support the repayment of the notes, as well as the impact of unrealized investment losses on the probability of the notes defaulting. The losses on the RMBS securities include both realized credit impairments as well as substantial unrealized mark-to-market losses, although none of the securities in the Ballantyne Re or Orkney Re II portfolios have experienced a payment default to date. The performance of the underlying level premium term business supporting both of the reserve funding structures is consistent with Moody's original expectations, and is not directly affected by movements in the investment portfolio. According to Scott Robinson, Vice President & Senior Credit Officer, "the quarterly requirement for Ballantyne Re and Orkney Re II to true up the market value of the assets held in the reserve credit trust to the level of the statutory reserves, combined with the investment losses on the RMBS securities, have significantly eroded unencumbered surplus in the two vehicles." Robinson added that "absent a recovery of unrealized losses or changes to the structures in their current form, it is likely that transactional restrictions would prevent the payment of interest on the notes -- essentially based on a measure of unencumbered capital to required capital --in the near-term." Moody's emphasized that despite the possibility of an interruption of interest payments, primarily driven by a decline in the market value of investments in the special purpose reinsurers, the ultimate loss on the notes (which are not insured by financial guarantors) will be driven both by the performance of the underlying term life business and the performance of the invested assets. We expect that Ballantyne Re will experience higher relative investment-related losses than Orkney Re II, given the different composition of the investment portfolios within the two structures, which helps to explain the lower rating on the subordinated notes of Ballantyne Re. Moody's added that for Orkney Re II, the credit profile has also been negatively impacted by the triggering of contractual provisions increasing fees paid to financial guarantors. According to Robinson, "the fees that are paid by Orkney Re II to insure certain classes of their notes have increased as a result of downgrades of Scottish Re (U.S.) since the deals were originally rated. This places greater pressure on the deal, especially if it is assumed that the increased fees are paid over a long period of time." In the Ballantyne Re transaction, the increased payments to the financial guarantors are subordinate to both Class A and B notes. As a result of this feature, increased fees paid to the guarantors have no impact on the ratings of Ballantyne Re. Most of the notes issued by these two special purpose reinsurers to fund the collateral requirements for the statutory reserves are insured by financial guarantors, while some of the notes were issued without financial guaranty insurance. The ratings of the uninsured notes (and the underlying ratings of the insured notes) consider the results of stochastic modeling of insurance and investment cash flows from the level premium term business supporting the transaction, including the modeled expected losses to the note holders. The review for downgrade will focus on the potential for additional investment losses in the RMBS portfolio and the nature and likely effectiveness of any actions that may be pursued by Ballantyne Re, Orkney Re II, and/or Scottish Re to mitigate the impact of losses on the ability of the special purpose reinsurer to pay interest on the notes. These rated notes are not affected by the current rating action: Ballantyne Re: -- US$500 million of Class A-2, Series A Floating Rate Notes, insured by Ambac Assurance UK Ltd. * Current Rating: Aaa, negative outlook -- US$500 million of Class A-2, Series B Floating Rate Notes, insured by Assured Guaranty (UK) Ltd. * Current Rating: Aaa, stable outlook -- US$400 million of Class A-3 Floating Rate Notes, insured by Ambac Assurance UK Ltd. * Current Rating: Aaa, negative outlook Orkney Re II: -- US$382.5 million of Class A-1 Floating Rate Notes, insured by Assured Guaranty (UK) Ltd. * Current Rating: Aaa, stable outlook The rating action concludes a review for downgrade on Orkney Re II's uninsured debt that was initiated on September 7, 2006. On Feb. 1, 2008, Moody's downgraded the uninsured notes of Ballantyne Re. Ballantyne Re plc and Orkney Re II plc are public limited companies established in Ireland as special purpose vehicles. Scottish Re is a Cayman Islands company with principal executive offices located in Bermuda. On Sept. 30, 2007, Scottish Re reported total assets of US$13.4 billion and shareholder's equity of US$869 million. |
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