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Rating Action:

Moody's takes rating actions on EUR 298.7m CLO notes of Leopard CLO V B.V.

Global Credit Research - 17 Jan 2014

Moody's also affirms EUR 43.3m notes of Leopard CLO V B.V.

London, 17 January 2014 -- Moody's Investors Service announced today that it has taken the rating actions on the ratings of the following notes issued by Leopard CLO V B.V.

....EUR100M (current outstanding balance of EUR 63.1M) Multicurrency Senior Secured Floating Rate Variable Funding Notes due 2023, Upgraded to Aaa (sf); previously on Oct 5, 2011 Confirmed at Aa1 (sf)

....EUR168M Class A Senior Secured Floating Rate Notes due 2023, Upgraded to Aaa (sf); previously on Oct 5, 2011 Confirmed at Aa1 (sf)

....EUR28M Class B Secured Deferrable Floating Rate Notes due 2023, Upgraded to A1 (sf); previously on Oct 5, 2011 Upgraded to A2 (sf)

....EUR13M Class C-1 Secured Deferrable Floating Rate Notes due 2023, Upgraded to Baa1 (sf); previously on Oct 5, 2011 Upgraded to Baa2 (sf)

....EUR7M Class C-2 Secured Deferrable Fixed Rate Notes due 2023, Upgraded to Baa1 (sf); previously on Oct 5, 2011 Upgraded to Baa2 (sf)

....EUR5M (current outstanding balance of EUR 3.6M) Class K Combination Notes due 2023, Upgraded to Baa1 (sf); previously on Oct 5, 2011 Upgraded to Baa2 (sf)

....EUR13M Class E-1 Secured Deferrable Floating Rate Notes due 2023, Downgraded to B3 (sf); previously on Oct 5, 2011 Upgraded to B1 (sf)

....EUR3M Class E-2 Secured Deferrable Fixed Rate Notes due 2023, Downgraded to B3 (sf); previously on Oct 5, 2011 Upgraded to B1 (sf)

Moody's also affirmed the rating of the following notes issued by Leopard CLO V B.V.:

....EUR26M Class D Secured Deferrable Floating Rate Notes due 2023, Affirmed Ba2 (sf); previously on Oct 5, 2011 Upgraded to Ba2 (sf)

....EUR7M Class F Secured Deferrable Floating Rate Notes due 2023, Affirmed Caa3 (sf); previously on Oct 5, 2011 Confirmed at Caa3 (sf)

....EUR5M (current outstanding balance of EUR 3.8M) Class W Combination Notes due 2023, Affirmed Ba1 (sf); previously on Oct 5, 2011 Upgraded to Ba1 (sf)

....EUR10M (current outstanding balance of EUR 6.5M) Class T Combination Notes due 2023, Affirmed Ba2 (sf); previously on Oct 5, 2011 Upgraded to Ba2 (sf)

Leopard CLO V B.V., issued in May 2007, is a multicurrency Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly high yield senior secured European loans. The portfolio is managed by M &G Investment Management Limited. The reinvestment period has expired in July 2013.

RATINGS RATIONALE

The upgrades to the ratings on the Variable Funding Notes (VFN), Class A, B, C-1, C-2 and K notes are primarily a result of the transaction entering amortising phase and the increase in WAS to 3.92%, as reported in the November 2013 trustee report, compared to the covenant level of 2.85%; the downgrade to the ratings on the Class E-1 and Class E-2 notes are due to deterioration in Class E over-collateralisation ("OC") ratio to 97.26% compared to 106.91% at the time of the last payment date in July 2013. Currently Class D, E and F Par Value Tests are failing.

The ratings of the three Combination Notes address the repayment of the Rated Balance on or before the legal final maturity. For Class W, Class K and Class T, 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. The current Rated Balance of Class W, Class K and Class T is approximately EUR 3.8M, EUR 3.6m and EUR 6.5M respectively. The Rated Balance may not necessarily correspond to the outstanding notional amount reported by the trustee.

The key model inputs Moody's uses 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 analysed the underlying collateral pool as having a performing par and principal proceeds balance of EUR 261.6M and GBP 41.2M , defaulted par of EUR 7.9M, a weighted average default probability of 19.44% (consistent with a WARF of 2,873), a weighted average recovery rate upon default of 49.17% for a Aaa liability target rating, a diversity score of 36 and a weighted average spread of 3.92%. The GBP 45.1M and USD 5.1M liabilities are naturally hedged by the GBP 37.2M and USD 1.0M of assets.

In its base case, Moody's addresses the exposure to obligors domiciled in countries with local currency country risk bond ceilings (LCCs) of A1 or lower. Given that the portfolio has exposures to 2.8% of obligors in Italy, whose LCC is A2, and 12.1% in Ireland and Spain, whose LCC is A3, Moody's ran the model with different par amounts depending on the target rating of each class of notes, in accordance with Section 4.2.11 and Appendix 14 of the methodology. The portfolio haircuts are a function of the exposure to peripheral countries and the target ratings of the rated notes, and amount to 2% for the VFN and Class A notes, 1.25% for the Class B notes and 0.5% for the Class C-1, Class C-2 and Class K notes.

The default probability derives from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The estimated average recovery rate 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 a recovery of 50% of the 97.64% of the portfolio exposed to first-lien senior secured corporate assets upon default and of 15% of the remaining non-first-lien loan corporate assets upon default. In each case, historical and market performance and a collateral manager's latitude to trade collateral are also relevant factors. Moody's incorporates these default and recovery characteristics of the collateral pool into its cash flow model analysis, subjecting them to stresses as a function of the target rating of each CLO liability it is analyzing.

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 4.72% 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 3,044 by forcing ratings on 50% of refinancing exposures to Ca. This run generated model outputs that were within one notch of the base-case results.

This transaction is subject to a high level of macroeconomic uncertainty, which could negatively affect the ratings on the note, in light of 1) uncertainty about credit conditions in the general economy 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 the legal interpretation of CDO documentation by different transactional parties due to because of embedded ambiguities.

Additional uncertainty about performance is due to the following:

1) Portfolio amortisation: The main source of uncertainty in this transaction is the pace of amortisation of the underlying portfolio, which can vary significantly depending on market conditions and have a significant impact on the notes' ratings. Amortisation could accelerate as a consequence of high loan prepayment levels or collateral sales by the collateral manager or be delayed by an increase in 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) Around 29% of the collateral pool consists of debt obligations whose credit quality Moody's has assessed by using credit estimates.

3) 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.

4) Foreign currency exposure: The deal has a significant exposure to non-EUR denominated assets. Volatility in foreign exchange rates will have a direct impact on interest and principal proceeds available to the transaction, which can affect the expected loss of rated tranches.

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.

REGUALATORY 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 takes rating actions on EUR 298.7m CLO notes of Leopard CLO V B.V.
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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