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Rating Action:

Moody's takes rating actions on EUR 68.5m CLO notes of North Westerly CLO II B.V.

24 Feb 2014

Moody's also affirms approximately EUR 114m CLO notes

London, 24 February 2014 -- Moody's Investors Service has taken rating actions on the following notes issued by North Westerly CLO II B.V:

....EUR5.4M Class B-1 Deferrable Interest Fixed Rate Notes due 2019, Confirmed at Baa2 (sf); previously on Nov 14, 2013 Baa2 (sf) Placed Under Review for Possible Upgrade

....EUR31.3M Class B-2 Deferrable Interest Floating Rate Notes due 2019, Confirmed at Baa2 (sf); previously on Nov 14, 2013 Baa2 (sf) Placed Under Review for Possible Upgrade

....EUR14.1M Class C Deferrable Interest Floating Rate Notes due 2019, Downgraded to B1 (sf); previously on Apr 17, 2013 Downgraded to Ba2 (sf)

....EUR7.68M (currently EUR 6.6M outstanding) Class D-1 Deferrable Interest Fixed Rate Notes due 2019, Downgraded to Caa3 (sf); previously on Apr 17, 2013 Downgraded to Caa1 (sf)

....EUR13.02M (currently EUR 11.1M outstanding) Class D-2 Deferrable Interest Floating Rate Notes due 2019, Downgraded to Caa3 (sf); previously on Apr 17, 2013 Downgraded to Caa1 (sf)

Moody's also affirmed the ratings on the following notes issued by North Westerly CLO II B.V.:

....EUR297.4M (currently EUR 113.5M outstanding) Class A Senior Floating Rate Notes due 2019, Affirmed Aaa (sf); previously on Apr 17, 2013 Affirmed Aaa (sf)

North Westerly CLO II B.V., issued in September 2004, is a Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly senior secured European loans. The portfolio is managed by NIBC Bank N.V. The reinvestment period of this transaction ended in Sep 2010.

RATINGS RATIONALE

The confirmation to the rating on the Class B notes is a result of an improvement in over-collateralisation ratios, but offset by a deterioration in the credit quality of the underlying portfolio. On 14 November 2013, Moody's had placed under review for possible upgrade, the rating of the class B notes due to significant loan prepayments. Today's actions conclude the rating review of the transaction.

The Class A notes have paid down by approximately EUR 38.7 million (or 25%) since the payment date in March 2013. As a result of this deleveraging, over-collateralisation has increased. As of the trustee's report dated 31 December 2013, the Class A now has an over-collateralisation ratio of 161.60%, compared with 140.61% 12 months ago. The OC ratios for classes B, C and D have increased moderately. As of the December 2013 trustee report the B, C and D OC ratios are reported at 122.11%, 111.63% and 100.77%, respectively, compared to a year ago, levels of 115.69%, 108.31% and 99.04%, respectively.

The downgrades to the rating of Classes C and D is due to the deterioration of the credit quality of the underlying collateral pool due mainly to the prepayments of the better rated assets.

Deterioration in the credit quality is observed through a weaker 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. Although, per the December 2013 trustee report, the WARF had improved to 3066 from 3248 in February 2013, the Moody's base case WARF has significantly deteriorated. Moody's base case WARF is currently 4598 compared to 4078 a year ago, whilst securities rated Caa1 or lower by Moody's has increased to 32.9% from 29.7% a year ago.

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 approximately EUR 175.7 million, defaulted par of EUR 18.8 million, a weighted average default probability of 26.56% (consistent with a WARF of 4598 with a weighted average life of 2.8 years), a weighted average recovery rate upon default of 46.96% for a Aaa liability target rating, a diversity score of 21 and a weighted average spread of 3.84%.

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 91.3% of the portfolio exposed to 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 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, Moody's conducted sensitivity analyses on the key parameters for the rated notes, for which it assumed a lower credit quality in the portfolio to address refinancing risk. Loans to European corporates rated B3 or lower and maturing between 2014 and 2015 make up approximately 18% of the portfolio, which could make refinancing difficult. Moody's ran a model in which it raised the base case WARF to 4877 by forcing ratings on 50% of the refinancing exposures to Ca; the model generated 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 and 2) the concentration of lowly- rated debt maturing between 2014 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) 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.

3) Around 55% of the collateral pool consists of debt obligations whose credit quality Moody's has been assessed by using credit estimates. As part of its base case, Moody's has stressed large concentrations of single obligors bearing a credit estimate as described in "Updated Approach to the Usage of Credit Estimates in Rated Transactions," published in October 2009 and available at https://www.moodys.com/research/Updated-Approach-to-the-Usage-of-Credit-Estimates-in-Rated--PBC_120461.

4) Liquidation value of long dated assets: Approximately 3.11% of the portfolio is comprised of assets that mature after the maturity date of the transaction ("long dated assets"). For those assets, Moody's assumed a weighted average liquidation value of 87.77% in its analysis. Any volatility between the assumed liquidation value and the actual liquidation value may create additional performance uncertainties.

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 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.

Hemal Shah
Asst Vice President - 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

Ian Perrin
VP - Sr Credit Officer/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 68.5m CLO notes of North Westerly CLO II B.V.
No Related Data.
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