Moody's also affirms ratings on GBP5.6m and EUR15.3m of notes
London, 04 November 2019 -- Moody's Investors Service ("Moody's") has upgraded the ratings on the
following notes issued by Duchess CLO VII B.V.:
....EUR15M Class E Fifth Priority Deferrable
Secured Floating Rate Notes due 2023, Upgraded to Aa2 (sf);
previously on Feb 13, 2019 Upgraded to A2 (sf)
Moody's has also affirmed the ratings on the following notes:
....EUR150M (current balance GBP 5.6M)
First Priority Senior Secured Floating Rate Variable Funding Notes due
2023, Affirmed Aaa (sf); previously on Feb 13, 2019 Affirmed
Aaa (sf)
....EUR32.5M (current balance EUR 15.3M)
Class D Fourth Priority Deferrable Secured Floating Rate Notes due 2023,
Affirmed Aaa (sf); previously on Feb 13, 2019 Upgraded to Aaa
(sf)
Duchess VII CLO B.V., issued in December 2006,
is a multi-currency collateralised loan obligation (CLO) backed
by a portfolio of mostly high-yield senior secured European loans.
The portfolio is managed by Barings (U.K.) Limited.
The transaction's reinvestment period ended in November 2013.
RATINGS RATIONALE
The rating actions on the notes are primarily a result of the deleveraging
of the Class C and Class D Notes following amortisation of the underlying
portfolio since the last rating action in February 2019. As a result,
the Class C Notes have fully redeemed and over-collateralisation
(OC) ratios have increased. According to the trustee report dated
August 2019 the Senior, Class D and Class E OC ratios are reported
at 751.08%, 263.05% and 160.70%
compared to December 2018 levels of 745.00%, 178.53%
and 138.46%, respectively.
The outstanding First Priority Senior Secured Floating Rate Variable Funding
Notes denominated in GBP (the "GBP VFN") are senior to the Notes issued
in EUR. The GBP VFN is initially repaid only from GBP principal
proceeds. In the event of a sterling mismatch, a situation
where the GBP VFN notional exceeds the sum of the performing GBP assets
and GBP principal balance, EUR principal proceeds will be diverted
to pay down the GBP VFN. Consequently, the GBP VFN is highly
dependent on the amortization of GBP assets in the portfolio and is expected
to fully redeem on the Aug 2022 payment date in the absence of prepayments,
sale or defaults of GBP assets. Similar to the Class C Notes that
have recently been fully repaid, it is likely that the Classes D
and E Notes will also fully redeem ahead of the GBP VFN. Moody's
believes that the GBP VFN rating is supported by a continuous high OC
level through the redemption of the Notes.
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 EUR performing
par of EUR 55.3 million and a GBP performing par of GBP 6.0
million, defaulted par of EUR 3.9 million and GBP 1.2
million, a weighted average default probability of 19.49%
over a weighted average life 2.47 years (consistent with a WARF
of 3629), a weighted average recovery rate upon default of 46.92%
for a Aaa liability target rating, a diversity score of 12 and a
weighted average spread of 3.79%. GBP denominated
liabilities are naturally hedged by GBP assets.
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. 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 analysing.
Moody's notes that the September 2019 trustee report was published at
the time it was completing its analysis of the August 2019 data.
Key portfolio metrics such as WARF, diversity score, weighted
average spread and life, and OC ratios exhibit little or no change
between these dates. The incremental EUR 0.14 million and
GBP 0.023 million of principal proceeds reported in September 2019
have no material impact on our analysis.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in March 2019.
Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Counterparty Exposure:
Today's rating action took into consideration the notes' exposure to relevant
counterparties, such as account bank, using the methodology
"Moody's Approach to Assessing Counterparty Risks in Structured Finance"
published on January 2019. Moody's concluded the ratings of the
notes are not constrained by these risks.
Factors that would lead to an upgrade or downgrade of the ratings:
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:
• 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.
Specifically in relation to the VFN, early amortization of the majority
of EUR assets in the portfolio would be credit negative particularly if
followed by deterioration in the pool of GBP assets supporting the VFN.
In such a scenario the amount of over-collateralisation available
to the VFN would be materially reduced or impaired.
• 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.
• Around 6% of the collateral pool consists of debt obligations
whose credit quality Moody's has 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 http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_120461.
• 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.
• Lack of portfolio granularity: The performance of the portfolio
depends to a large extent on the credit conditions of a few large obligors
with low non-investment-grade ratings, especially
when they default. Because of the deal's lack of granularity,
Moody's supplemented its typical Binomial Expansion Technique analysis
with a simulated default distribution using Moody's CDOROM™ software.
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.
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.
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, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
Raja Iyer
Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Ian Perrin
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
