Moody's also affirms the ratings on $46.7 million of notes
New York, June 10, 2016 -- Moody's Investors Service has downgraded the rating on the following notes
issued by Marlborough Street CLO, Ltd.:
U.S.$9,000,000 Class E Secured Deferrable
Floating Rate Notes Due April 18, 2019, Downgraded to B2 (sf);
previously on November 04, 2015 Affirmed Ba3 (sf)
In addition, Moody's also affirmed the ratings on the following
notes:
U.S.$93,000,000 Class A-1 Senior
Secured Floating Rate Notes Due April 18, 2019 (current outstanding
balance of $1,490,462), Affirmed Aaa (sf);
previously on November 04, 2015 Affirmed Aaa (sf)
U.S.$14,000,000 Class A-2B Senior
Secured Floating Rate Notes Due April 18, 2019 (current outstanding
balance of $2,243,707), Affirmed Aaa (sf);
previously on November 04, 2015 Affirmed Aaa (sf)
U.S.$13,000,000 Class B Senior Secured
Floating Rate Notes Due April 18, 2019, Affirmed Aaa (sf);
previously on November 04, 2015 Affirmed Aaa (sf)
U.S.$15,000,000 Class C Secured Deferrable
Floating Rate Notes Due April 18, 2019, Affirmed Aaa (sf);
previously on November 04, 2015 Affirmed Aaa (sf)
U.S.$15,000,000 Class D Secured Deferrable
Floating Rate Notes Due April 18, 2019, Affirmed A1 (sf);
previously on November 04, 2015 Upgraded to A1 (sf)
Marlborough Street CLO, Ltd., issued in April 2007,
is a collateralized loan obligation (CLO) backed primarily by a portfolio
of senior secured loans. The transaction's reinvestment period
ended in April 2013.
RATINGS RATIONALE
The rating downgrade on the Class E notes reflects a decrease in the Class
E OC ratio and deterioration in the credit quality of the underlying collateral
portfolio. Based on the trustee's May 2016 report, the Class
E OC ratio is at 104.86%, versus the October 2015
level of 105.60%. The erosion of the Class E OC ratio
is a result of exposure to a new defaulted security with poor recovery
prospects since November 2015. Additionally, the trustee's
reported weighted average rating factor for May 2016 is 2901 compared
to 2741 in October 2015, attributable in part to a sharp increase
in exposures to collateral securities rated Caa1 or lower.
The rating affirmations on the Class A-1, A-2B,
B and C notes are primarily a result of deleveraging of the senior notes
and an increase in the transaction's Class B, C and D over-collateralization
(OC) ratios since November 2015. The Class A-1 and Class
A-2B notes have been paid down by approximately 74.3%
or $10.7 million since then. Based on the trustee's
May 2016 report, the OC ratios for the Class B, C and D notes
are reported at 349.26%, 184.17%and
125.06%, respectively, versus October 2015 levels
of 219.73%, 155.21%, 119.98%,
respectively.
The portfolio includes a number of investments in securities that mature
after the notes do. Based on Moody's calculation, securities
that mature after the notes do currently make up approximately 8.3%
of the portfolio. These investments could expose the notes to market
risk in the event of liquidation when the notes mature.
Methodology Used for 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:
This transaction is subject to a number of factors and circumstances that
could lead to either an upgrade or downgrade of the ratings:
1) Macroeconomic uncertainty: CLO performance is subject to a) uncertainty
about credit conditions in the general economy and b) the large concentration
of upcoming speculative-grade debt maturities, which could
make refinancing difficult for issuers.
2) Collateral Manager: Performance can also be affected positively
or negatively by a) the manager's investment strategy and behavior
and b) differences in the legal interpretation of CLO documentation by
different transactional parties owing to embedded ambiguities.
3) Collateral credit risk: A shift towards collateral of better
credit quality, or better credit performance of assets collateralizing
the transaction than Moody's current expectations, can lead
to positive CLO performance. Conversely, a negative shift
in credit quality or performance of the collateral can have adverse consequences
for CLO performance.
4) Deleveraging: An important source of uncertainty in this transaction
is whether deleveraging from unscheduled principal proceeds will continue
and at what pace. Deleveraging of the CLO could accelerate owing
to high prepayment levels in the loan market and/or collateral sales by
the manager, which could have a significant impact on the notes'
ratings. Note repayments that are faster than Moody's current
expectations will usually have a positive impact on CLO notes, beginning
with those with the highest payment priority.
5) Recovery of defaulted assets: Fluctuations in the market value
of defaulted assets reported by the trustee and those that Moody's
assumes as having defaulted could result in volatility in the deal's
OC levels. Further, the timing of recoveries and whether
a manager decides to work out or sell defaulted assets create additional
uncertainty.
6) Long-dated assets: The presence of assets that mature
after the CLO's legal maturity date exposes the deal to liquidation
risk on those assets. This risk is borne first by investors with
the lowest priority in the capital structure. Moody's assumes
that the terminal value of an asset upon liquidation at maturity will
be equal to the lower of an assumed liquidation value (depending on the
extent to which the asset's maturity lags that of the liabilities)
or the asset's current market value.
7) Higher-than-average exposure to assets with weak liquidity:
The presence of assets with the worst Moody's speculative grade liquidity
(SGL) rating, or SGL-4, exposes the notes to additional
risks if these assets default. The historical default rate is far
higher for companies with SGL-4 ratings than those with other SGL
ratings. Due to the deal's high exposure to SGL-4 rated
assets, which constitute around $3.3 million of par,
Moody's ran a sensitivity case defaulting those assets.
8) Limited portfolio granularity: The performance of the portfolio
will depends to a material extent on a few large obligors Moody's
rates Caa1 or lower. Based on Moody's analysis, the
collateral portfolio consists of seven securities rated Caa1 or lower
comprising 22% in aggregate of the collateral. A jump to
default by one or more of such securities could result in a notable reduction
in the collateral par coverage, especially for the Class E notes.
In addition to the base case analysis, Moody's also conducted sensitivity
analyses to test the impact of a number of default probabilities on the
rated notes relative to the base case modeling results, which may
be different from the current public ratings of the notes. Below
is a summary of the impact of different default probabilities (expressed
in terms of WARF) on all of the rated notes (by the difference in the
number of notches versus the current model output, for which a positive
difference corresponds to lower expected loss):
Moody's Adjusted WARF -- 20% (2552)
Class A-1: 0
Class A-2A: 0
Class A-2B: 0
Class B: 0
Class C: 0
Class D: +1
Class E: +2
Moody's Adjusted WARF + 20% (3828)
Class A-1: 0
Class A-2A: 0
Class A-2B: 0
Class B: 0
Class C: 0
Class D: -1
Class E: -1
Loss and Cash Flow Analysis:
Moody's modeled the transaction using a cash flow model based on
the Binomial Expansion Technique, as described in "Moody's Global
Approach to Rating Collateralized Loan Obligations."
The key model inputs Moody's used in its analysis, such as
par, weighted average rating factor, diversity score and the
weighted average recovery rate, are based on its published methodology
and could differ from the trustee's reported numbers. In its base
case, Moody's analyzed the collateral pool as having a performing
par and principal proceeds balance of $45.7 million,
defaulted par of 8.2 million, a weighted average default
probability of 15.48% (implying a WARF of 3190), a
weighted average recovery rate upon default of 54.69%,
a diversity score of 19 and a weighted average spread of 2.92%
(before accounting for LIBOR floors).
Moody's incorporates the default and recovery properties of the
collateral pool in cash flow model analysis where they are subject to
stresses as a function of the target rating on each CLO liability reviewed.
Moody's derives the default probability from the credit quality
of the collateral pool and Moody's expectation of the remaining
life of the collateral pool. The average recovery rate for future
defaults is based primarily on the seniority of the assets in the collateral
pool. Moody's generally applies recovery rates for CLO securities
as published in "Moody's Approach to Rating SF CDOs".
In some cases, alternative recovery assumptions may be considered
based on the specifics of the analysis of the CLO transaction.
In each case, historical and market performance and the collateral
manager's latitude for trading the collateral are also factors.
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 describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
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 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.
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.
Aileen Wang
Associate Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Ramon O. Torres
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades rating on $9.0 million of notes issued by Marlborough Street CLO, Ltd.
