Moody's also affirms EUR 89.8m CLO notes of Partholon CDO I PLC
London, 08 March 2013 -- Moody's Investors Service announced today that it has upgraded the ratings
of the following notes issued by Partholon CDO I plc:
....EUR31.432M Class B-1 Floating
Rate Notes, Upgraded to Aa3 (sf); previously on Aug 3,
2011 Upgraded to A3 (sf)
....EUR2.25M Class B-2 Fixed
Rate Notes, Upgraded to Aa3 (sf); previously on Aug 3,
2011 Upgraded to A3 (sf)
....EUR4M Class B-3 Zero Coupon Notes,
Upgraded to Aa3 (sf); previously on Aug 3, 2011 Upgraded to
A3 (sf)
....EUR10M Class S Combination Notes (currently
EUR5.9M rated balance outstanding), Upgraded to Baa1 (sf);
previously on Aug 3, 2011 Upgraded to Ba2 (sf)
....EUR4M Class R Combination Notes (currently
EUR2.9M rated balance outstanding), Upgraded to Aa1 (sf);
previously on Aug 3, 2011 Upgraded to A2 (sf)
Moody's also affirmed the ratings of the following notes issued
by Partholon CDO I plc:
....EUR271.443M Class A-1 Floating
Rate Notes (currently EUR51.3M outstanding), Affirmed Aaa
(sf); previously on Aug 3, 2011 Upgraded to Aaa (sf)
....EUR9M Class A-3 Zero Coupon Notes
(currently EUR2.3M outstanding), Affirmed Aaa (sf);
previously on Aug 3, 2011 Upgraded to Aaa (sf)
....EUR28.45M Class C-1 Floating
Rate Notes, Affirmed B1 (sf); previously on Aug 3, 2011
Upgraded to B1 (sf)
....EUR7.75M Class C-2 Fixed
Rate Notes, Affirmed B1 (sf); previously on Aug 3, 2011
Upgraded to B1 (sf)
....EUR24M Class J Combination Notes (currently
EUR4M rated balance outstanding), Affirmed Aaa (sf); previously
on Aug 3, 2011 Upgraded to Aaa (sf)
Partholon CDO 1 plc, issued in October 2003, is a Collateralised
Loan Obligation ("CLO") backed by a portfolio of mostly high yield European
loans. It is predominantly composed of senior secured loans.
The portfolio is managed by The Governor & Company of the Bank of
Ireland. This transaction ended its reinvestment period on 06 January
2009.
RATINGS RATIONALE
According to Moody's, the rating actions taken on the notes result
primarily from the amortisation of the Class A Notes, which have
been paid down by approximately 65%, or EUR 95 million,
since the last rating action in August 2011.
As a result of this deleveraging, the overcollateralization ratios
(or "OC ratios") have increased since the rating action in
August 2011. As of the latest trustee report dated 01 February
2013, the Class A/B and Class C OC ratios are reported at 149.53%
and 107.08%, respectively, versus July 2011
levels of 119.87% and 105.72%, respectively.
All OC tests are currently in compliance.
In its base case, Moody's analyzed the underlying collateral
pool to have a performing par and principal proceeds balance of EUR 140.6
million, defaulted par of EUR 15.1 million, a weighted
average default probability of 25.16% with a weighted average
life of 2.5 years, a weighted average recovery rate upon
default of 46.44% for a Aaa liability target rating,
a diversity score of 16 and a weighted average spread of 3.38%.
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 realized 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 91.1%
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 10%. 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) Deterioration of credit quality to address the refinancing and sovereign
risks -- Approximately 51% of the portfolio are European corporate
rated B3 and below and maturing between 2014 and 2016, which may
create challenges for issuers to refinance. Approximately 2.4%
of the portfolio are exposed to obligors located in Spain. Moody's
considered a model run where the base case WARF was increased to 5097
by forcing ratings on 25% of such exposure to Ca. This run
generated model outputs that were within one notch from the base case
results.
The ratings of the Combination Notes address the repayment of the Rated
Balance on or before the legal final maturity. For Class S,
the 'Rated Balance' is equal at any time to the principal amount of the
Combination Note on the Issue Date increased by the Rated Coupon of 3.0%
per annum accrued on the Rated Balance on the preceding payment date minus
the aggregate of all payments made from the Issue Date to such date,
either through interest or principal payments. For Classes J and
R which do not accrue interest, 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 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 investment strategy
and 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) Portfolio Amortisation: The main source of uncertainty in this
transaction is whether delevering from unscheduled principal proceeds
will continue and at what pace. Delevering may accelerate due to
high prepayment levels in the loan market and/or collateral sales by the
liquidation agent, which may have significant impact on the notes'
ratings.
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.
3) Moody's also notes that 87% of the collateral pool consists
of debt obligations whose credit quality has been assessed through Moody's
credit estimates. Large single exposures to obligors bearing a
credit estimate have been subject to a stress applicable to concentrated
pools as per the report titled "Updated Approach to the Usage of Credit
Estimates in Rated Transactions" published in October 2009.
4) Long-dated assets: Moody's notes that the underlying portfolio
includes a number of investments in securities that mature after the maturity
date of the notes. As of February 2013, reference securities
that mature after the maturity date of the notes currently make up approximately
5.2% of the underlying performing reference portfolio.
These investments potentially expose the notes to market risk in the event
of liquidation at the time of the notes' maturity.
The principal methodology used in this rating was "Moody's Approach to
Rating Collateralized Loan Obligations" published in June 2011.
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 Approach
to Rating Collateralized Loan Obligations" rating methodology published
in June 2011.
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
and jurisdiction 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 EMEA Cash-Flow
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. Therefore,
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.
On 21 August 2012, Moody's released a Request for Comment seeking
market feedback on proposed adjustments to its modelling assumptions.
These adjustments are designed to account for the impact of rapid and
significant country credit deterioration on structured finance transactions.
If the adjusted approach is implemented as proposed, the rating
of the notes affected by today rating action may be negatively affected.
See "Approach to Assessing the Impact of a Rapid Country Credit Deterioration
on Structured Finance Transactions", (http://www.moodys.com/research/Approach-to-Assessing-the-Impact-of-a-Rapid-Country-Credit--PBS_SF294880)
for further details regarding the implications of the proposed methodology
changes on Moody's ratings.
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.
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
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
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 37.7m CLO notes of Partholon CDO I PLC
