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Rating Action:

Moody's upgrades EUR 31m CLO notes of Wood Street CLO II B.V.

28 Aug 2013

London, 28 August 2013 -- Moody's Investors Service announced today that it has upgraded the rating of the following notes issued by Wood Street CLO II B.V.:

....EUR31.08M Class B Senior Secured Floating Rate Notes, Upgraded to Aa2 (sf); previously on Nov 1, 2011 Upgraded to Aa3 (sf)

Moody's also affirmed the ratings of the following notes issued by Wood Street CLO II B.V.:

....EUR228.12M Class A-1 Senior Secured Floating Rate Notes, Affirmed Aaa (sf); previously on Nov 1, 2011 Upgraded to Aaa (sf)

....EUR40M Class A-2 Senior Secured Floating Rate Notes, Affirmed Aaa (sf); previously on Nov 1, 2011 Upgraded to Aaa (sf)

....EUR25.84M Class C Senior Secured Deferrable Floating Rate Notes, Affirmed Baa1 (sf); previously on Nov 1, 2011 Upgraded to Baa1 (sf)

....EUR25.26M Class D Senior Secured Deferrable Floating Rate Notes, Affirmed Ba2 (sf); previously on Nov 1, 2011 Upgraded to Ba2 (sf)

....EUR9.135M Class E Senior Secured Deferrable Floating Rate Notes, Affirmed B1 (sf); previously on Nov 1, 2011 Upgraded to B1 (sf)

....EUR4.5M Class Z Combination Notes, Affirmed Baa3 (sf); previously on Nov 1, 2011 Upgraded to Baa3 (sf)

Wood Street CLO II B.V., issued in March 2006 and managed by Alcentra Limited, is a single currency Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly high yield European loans. The transaction passed its reinvestment period in March 2011.

RATINGS RATIONALE

According to Moody's, the rating actions taken on the notes are primarily a result of deleveraging of the Classes A-1 and A-2 notes on the last payment date in March 2013. The Class A-1 notes, were paid down by EUR 20.2 million, reducing the outstanding balance from EUR 163.7 million to EUR 143.5 million (8.9% of the original notional amount). The Class A-2 notes were paid down by EUR 3.5 million from EUR 28.7 million to EUR 25.2 million (8.8% of the original notional amount).

As a result of the deleveraging, the overcollateralization ratios have increased since the last payment date in March 2013. As of the latest trustee report dated July 2013, the Class A/B, Class C, Class D and Class E overcollateralization ratios are reported at 136.94%, 121.25%, 109.04% and 105.21%, respectively, compared to 131.30%, 117.69%, 106.86% and 103.42% respectively in March 2013.

The rating of the Combination Note addresses the repayment of the Rated Balance on or before the legal final maturity. For Class Z, 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 Rated Balance may not necessarily correspond to the outstanding notional amount reported by the trustee.

Moody's notes that the key model inputs used by Moody's in its analysis, such as par, weighted average rating factor, diversity score, and weighted average recovery rate, are based on its published methodology and may be different from the trustee's reported numbers. In its base case, Moody's analysed the underlying collateral pool to have a performing par and principal proceeds balance of EUR 276.0 million, defaulted par of EUR 10.1 million, a weighted average default probability of 27.5% (consistent with a WARF of 3717), a weighted average recovery rate upon default of 57.38% for a Aaa liability target rating, a diversity score of 15 and a weighted average spread of 4.31%.

The default probability is derived from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The average recovery rate to be realised 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 93.5% of the portfolio exposed to first lien 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 trends and collateral manager latitude for trading the collateral are also relevant factors. These default and recovery properties of the collateral pool are incorporated in cash flow model analysis where they are subject to stresses as a function of the target rating of each CLO liability being reviewed.

In addition to the base case analysis described above, Moody's also performed sensitivity analyses on key parameters for the rated notes:

1) The portfolio is also exposed 14.03% to obligors located in Spain, Ireland and Italy with respective country ceilings of A3, A3 and A2. On 14 August 2013, Moody's released a report describing how it proposes to incorporate the additional credit risk of exposures domiciled in countries with country ceilings that are single A or lower when rating CLO tranches that carry ratings higher than those ceilings. See "Request for Comment: Moody's Approach to Capturing Country Risk in CLOs (August 2013)". In our analysis we incorporated these sensitivities through applying par value haircuts as detailed in the report. The Aaa and Aa par value haircut scenarios generated model outputs that were consistent to the base case results.

2) Deterioration of credit quality to address the refinancing together with the sovereign risks -- Approximately 19.35% of the portfolio is rated B3 and below with maturities between 2014 and 2016, which may create challenges for issuers to refinance. The portfolio is also exposed 14.03% to obligors located in Spain, Ireland and Italy. Moody's considered the scenario where the WARF of the portfolio was increased to 4393 by forcing to Ca the credit quality of 25% of such exposures subject to refinancing or sovereign risks. This scenario generated model outputs that were up to one notch lower than the base case results.

Moody's notes that this transaction is subject to a high level of macroeconomic uncertainty, which could negatively impact the ratings of the notes, as evidenced by 1) uncertainties of credit conditions in the general economy and 2) the large concentration of speculative-grade debt maturing between 2014 and 2016 which may create challenges for issuers to refinance. CLO notes' performance may also be impacted either positively or negatively by 1) the manager's behaviour and 2) divergence in legal interpretation of CDO documentation by different transactional parties due to embedded ambiguities.

Sources of additional performance uncertainties are described below:

1) Deleveraging: The main source of uncertainty in this transaction is the pace of amortisation of the underlying portfolio. Pace of amortisation could vary significantly subject to market conditions and this may have a significant impact on the notes' ratings. In particular, amortisation could accelerate as a consequence of high levels of prepayments in the loan market or collateral sales by the Collateral Manager or be delayed by rising loan amend-and-extent restructurings. Fast amortisation would usually benefit the ratings of the notes.

2) Recovery of defaulted assets: Market value fluctuations in defaulted assets reported by the trustee and those assumed to be defaulted by Moody's may create volatility in the deal's overcollateralization levels. Further, the timing of recoveries and the manager's decision to work out versus sell defaulted assets create additional uncertainties. Moody's analyzed defaulted recoveries assuming the lower of the market price and the recovery rate in order to account for potential volatility in market prices. Realization of higher than expected recoveries would positively impact the ratings of the notes.

The principal methodology used in this rating was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's modelled the transaction using the Binomial Expansion Technique, as described in Section 2.3.2.1 of the "Moody's Global Approach to Rating Collateralized Loan Obligations" rating methodology published in May 2013.

Under this methodology, Moody's used its Binomial Expansion Technique, whereby the pool is represented by independent identical assets, the number of which is being determined by the diversity score of the portfolio. The default and recovery properties of the collateral pool are incorporated in a cash flow model where the default probabilities are subject to stresses as a function of the target rating of each CLO liability being reviewed. The default probability range is derived from the credit quality of the collateral pool, and Moody's expectation of the remaining life of the collateral pool. The average recovery rate to be realized on future defaults is based primarily on the seniority of the assets in the collateral pool.

The cash flow model used for this transaction, whose description can be found in the methodology listed above, is Moody's CDO Edge Model.

This model was used to represent the cash flows and determine the loss for each tranche. The cash flow model evaluates all default scenarios that are then weighted considering the probabilities of the binomial distribution assumed for the portfolio default rate. In each default scenario, the corresponding loss for each class of notes is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and noteholders. Therefore, the expected loss or EL for each tranche is the sum product of (i) the probability of occurrence of each default scenario; and (ii) the loss derived from the cash flow model in each default scenario for each tranche. As such, Moody's analysis encompasses the assessment of stressed scenarios.

In addition to the quantitative factors that are explicitly modelled, qualitative factors are part of the rating committee considerations. These qualitative factors include the structural protections in each transaction, the recent deal performance in the current 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, may influence the final rating decision.

REGULATORY DISCLOSURES

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.

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.

Son Nguyen
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 upgrades EUR 31m CLO notes of Wood Street CLO II B.V.
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