Madrid, September 15, 2016 -- Moody's Investors Service has downgraded the ratings on the following
notes issued by Leveraged Finance Europe Capital III B.V.:
....EUR19.8M (current outstanding balance
EUR 12.5M) D Notes, Downgraded to Caa3 (sf); previously
on Nov 24, 2014 Affirmed Caa2 (sf)
....EUR7.35M (current outstanding balance
EUR 3.4M) E Notes, Downgraded to Ca (sf); previously
on Nov 24, 2014 Affirmed Caa3 (sf)
....EUR6M R Notes, Downgraded to Ca
(sf); previously on Nov 24, 2014 Affirmed Caa3 (sf)
Moody's has also affirmed the ratings on the following notes:
....EUR15M S Notes, Affirmed Aa2 (sf);
previously on Sep 28, 2015 Downgraded to Aa2 (sf)
Leveraged Finance Europe Capital III B.V., issued
in August 2004, is a collateralised loan obligation (CLO) backed
by a portfolio of mostly high-yield senior secured European loans.
The portfolio is managed by BNP Paribas Asset Management. The transaction's
reinvestment period ended in October 2009.
RATINGS RATIONALE
Today's actions follow the Issuer's notification on 1 September
2016, of the occurrence of an Event of Default ("EoD").
Such EoD occurred following the Class D Notes Over Collateralisation Test
going below 100%.
According to the documentation of the transaction, during the EoD,
Class D as the Controlling Class can instruct the trustee as to the course
of action to follow which is either liquidation or acceleration.
While this process is currently on-going, Moody's has
assessed under various scenarios the severity of losses that could impact
the remaining outstanding classes of notes.
The credit quality has deteriorated as reflected in the increase of the
average credit rating of the portfolio (measured by the weighted average
rating factor, or WARF) and an increase in the proportion of securities
from issuers with ratings of Caa1 or lower. According to the trustee
report dated July 2016, the WARF was 5390, compared with 4515
in the July 2015 report. Securities with ratings of Caa1 or lower
currently make up approximately 58.2% of the underlying
portfolio, versus 40.23% in July 2015.
The ratings of the Combination Notes address the repayment of the Rated
Balance on or before the legal final maturity. The Rated Balance
may not necessarily correspond to the outstanding notional amount reported
by the trustee.
For Class R, the 'Rated Balance' is equal at any time to the principal
amount of the Combination Note on the Issue Date increased by a Rated
Coupon of 1% per annum respectively, accrued on the Rated
Balance on the preceding payment date minus the aggregate of all payments
made from the Issue Date to such date, either through interest or
principal payments. Class R is a combination of the class E notes
and the equity piece in the CLO.
For Class S, the 'Rated Balance' is equal at any time to the principal
amount of the Combination Note on the Issue Date minus the aggregate of
all payments made from the Issue Date to such date, either through
interest or principal payments. Class S is a combination of the
equity piece and a stripped French Treasury (Obligation Assimilable du
Tresor Securities or 'OAT strip'). Class S rating is essentially
a pass-through of the rating of the Government of France.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in December 2015.
Please see the Ratings Methodologies page on www.moodys.com
for a copy of this methodology.
Factors that would lead to an upgrade or downgrade of the ratings:
In the case of liquidation of the portfolio, the severity of losses
will depend on the market value that can be realized. Moody's
conducted sensitivity analysis on the possible liquidation proceeds received
pursuant to such sales. The losses generated outputs that were
consistent with today's rating actions.
This transaction is subject to a high level of macroeconomic uncertainty,
which could negatively affect the ratings on the note, in light
of uncertainty about credit conditions in the general economy.
CLO notes' performance may also be impacted either positively or
negatively by 1) the manager's investment strategy and behaviour
and 2) divergence in the legal interpretation of CDO documentation by
different transactional parties because of embedded ambiguities.
Additional uncertainty about performance is due to the following:
• Recovery of defaulted assets: Market value fluctuations in
trustee-reported defaulted assets and those Moody's assumes
have defaulted can result in volatility in the deal's over-collateralisation
levels. Further, the timing of recoveries and the manager's
decision whether to work out or sell defaulted assets can also result
in additional uncertainty. Moody's analysed defaulted recoveries
assuming the lower of the market price or the recovery rate to account
for potential volatility in market prices. Recoveries higher than
Moody's expectations would have a positive impact on the notes'
ratings.
• 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, the liquidation value of such an asset will depend on
the nature of the asset as well as the extent to which the asset's
maturity lags that of the liabilities. Liquidation values higher
than Moody's expectations would have a positive impact on the notes'
ratings.
In addition to the quantitative factors that Moody's explicitly
modelled, qualitative factors are part of the rating committee's
considerations. These qualitative factors include the structural
protections in the transaction, its recent performance given the
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,
can 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 use any models, or loss or cash flow analysis,
in its analysis.
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.
Javier Hevia Portocarrero
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Ian Perrin
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
