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Rating Action:

Moody's confirms EUR 10.5m CLO notes of Aquilae CLO I PLC

11 Dec 2013

Moody's also affirms EUR 39m notes of Aquilae CLO I PLC

London, 11 December 2013 -- Moody's Investors Service announced today that it has confirmed the rating of Class D notes issued by Aquilae CLO I PLC:

....EUR10.5M Class D Deferrable Floating Rate Notes, due 2015, Confirmed at A2 (sf); previously on Nov 14, 2013 Upgraded to A2 (sf) and Placed Under Review for Possible Upgrade

Moody's also affirmed the ratings of the following notes issued by Aquilae CLO I PLC:

....EUR12M Class B Floating Rate Notes, due 2015, Affirmed Aaa (sf); previously on Apr 12, 2013 Upgraded to Aaa (sf)

....EUR15M Class C Deferrable Floating Rate Notes, due 2015, Affirmed Aaa (sf); previously on Nov 14, 2013 Upgraded to Aaa (sf)

....EUR12M Class E Deferrable Floating Rate Notes, due 2015, Affirmed Caa1 (sf); previously on Apr 12, 2013 Affirmed Caa1 (sf)

Aquilae CLO I PLC, issued in December 2003, is a Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly senior secured European loans. The portfolio is managed by Henderson Global Investors Ltd. The reinvestment period has expired in August 2008.

RATINGS RATIONALE

Moody's had previously upgraded the rating on 14 November 2013 of Class C to Aaa (sf) and Class D to A2 (sf) and left it on review for upgrade due to significant loan prepayments. Today's rating confirmation on Class D primarily reflects improvement in the overcollateralisation ratios which offsets the deterioration in the credit quality of the asset pool observed through a higher average credit rating of the portfolio (as measured by the weighted average rating factor "WARF") and an increase in the proportion of securities from issuers rated Caa1 and below. Today's action concludes the rating review of the transaction.

Additionally, Moody's notes that the underlying portfolio includes a number of investments in securities that mature after the maturity date of the notes. Based on the October 2013 trustee report, these securities currently make up approximately 45% of the underlying reference portfolio compared to 16% in April 2013. These investments potentially expose the notes to market risk in the event of liquidation at the time of the notes' maturity.

Moody's notes that the key model inputs used by Moody's in its analysis, such as par, weighted average rating factor, diversity score, and weighted average recovery rate, are based on its published methodology and may be different from the trustee's reported numbers. In its base case, Moody's analysed the underlying collateral pool to have a performing par and principal proceeds balance of EUR 62.4 million, defaulted par of EUR 0.47 million, a weighted average default probability of 28% (consistent with a weighted average rating factor "WARF" of 5470), a weighted average recovery rate upon default of 49.43% for a Aaa liability target rating, a diversity score of 9 and a weighted average spread of 2.78%.

As part of the base case, Moody's has addressed the exposure to obligors domiciled in countries with local currency country risk bond ceilings (LCCs) of A1 and below. Given the portfolio is exposed to 17.37% of obligors located in Ireland and Spain, whose LCC is A3, the model was run with different par amounts depending on the target rating of each class of notes as further described in the Section 4.2.11 and Appendix 14 of the methodology. The portfolio haircuts are a function of the exposure size to peripheral countries and the target ratings of the rated notes and amount to 2.95% for the Class B and C notes and 0.74% for the Class D notes.

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 realised on future defaults is based primarily on the seniority of the assets in the collateral pool. For a Aaa liability target rating, Moody's assumed that 98.37% of the portfolio exposed to first lien senior secured corporate assets would recover 50% upon default, while the remainder non first-lien loan corporate assets would recover 15%. In each case, historical and market performance trends and collateral manager latitude for trading the collateral are also relevant factors. These 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.

Methodology Underlying the Rating Action:

The principal methodology used in this rating was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in November 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the rating:

In addition to the base case analysis described above, Moody's also performed sensitivity analysis on key parameters for the rated notes, which includes deteriorating credit quality of portfolio to address the refinancing risk.

Approximately 33% of the portfolio is European corporate rated B3 and below and maturing between 2013 and 2015, which may create challenges for issuers to refinance. Moody's considered a model run where the base case WARF was increased to 5,762 by forcing ratings on 25% of refinancing exposures to Ca. This run generated model outputs that were consistent with the base case results.

Moody's notes that this transaction is subject to a high level of macroeconomic uncertainty, which could negatively impact the ratings of the notes, as evidenced by 1) uncertainties of credit conditions in the general economy especially as 17.4% of the portfolio is exposed to obligors located in Ireland and Spain and 2) the large concentration of lowly rated debt maturing between 2013 and 2015 which may create challenges for issuers to refinance. CLO notes' performance may also be impacted either positively or negatively by 1) the manager's investment strategy and behaviour and 2) divergence in legal interpretation of CDO documentation by different transactional parties due to embedded ambiguities.

Sources of additional performance uncertainties are described below:

1) Portfolio amortisation: The main source of uncertainty in this transaction is the pace of amortisation of the underlying portfolio. Pace of amortisation could vary significantly subject to market conditions and this may have a significant impact on the notes' ratings. In particular, amortisation could accelerate as a consequence of high levels of prepayments in the loan market or collateral sales by the liquidation agent / the Collateral Manager or be delayed by rising loan amend-and-extend restructurings. Fast amortisation would usually benefit the ratings of the notes beginning with the notes having the highest prepayment priority.

2) Moody's also notes that around 54.34% of the collateral pool consists of debt obligations whose credit quality has been assessed through Moody's credit estimates. Large single exposures to obligors bearing a credit estimate have been subject to a stress applicable to concentrated pools as per the report titled "Updated Approach to the Usage of Credit Estimates in Rated Transactions" published in October 2009.

3) 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 overcollateralisation levels. Further, the timing of recoveries and the manager's decision to work out versus sell defaulted assets create additional uncertainties. Realisation of higher recoveries than Moody's assumed would positively impact the ratings of the notes.

4) Long-dated assets: The presence of assets that mature beyond the CLO's legal maturity date exposes the deal to liquidation risk on those assets. Moody's assumes that at transaction maturity such an asset has a liquidation value dependent on the nature of the asset as well as the extent to which the asset's maturity lags that of the liabilities. Realisation of higher than expected liquidation values would positively impact the ratings of the notes.

In addition to the quantitative factors that are explicitly modelled, qualitative factors are part of the rating committee considerations. These qualitative factors include the structural protections in each transaction, the recent deal performance in the current market environment, the legal environment, specific documentation features, the collateral manager's track record, and the potential for selection bias in the portfolio. All information available to rating committees, including macroeconomic forecasts, input from other Moody's analytical groups, market factors, and judgments regarding the nature and severity of credit stress on the transactions, may influence the final rating decision.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

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.

As the section on loss and cash flow analysis describes, 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 or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Branimir Jovanovic
Associate Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Neelam S Desai
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms EUR 10.5m CLO notes of Aquilae CLO I PLC
No Related Data.
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