Moody's also affirms EUR 32.4M of Class A-1 and A-2 notes
London, 31 October 2013 -- Moody's Investors Service announced today that it has upgraded the following
notes issued by Adagio CLO I B.V.:
....EUR4.8M Class B-1 Senior
Floating Rate Notes due 2019, Upgraded to Aaa (sf); previously
on Feb 1, 2013 Upgraded to Aa2 (sf)
....EUR21.2M Class B-2 Senior
Fixed Rate Notes due 2019, Upgraded to Aaa (sf); previously
on Feb 1, 2013 Upgraded to Aa2 (sf)
....EUR13.5M Class C Senior Subordinated
Deferrable Floating Rate Notes due 2019, Upgraded to Aaa (sf);
previously on Feb 1, 2013 Upgraded to Baa1 (sf)
....EUR14.55M Class D-1 Senior
Subordinated Deferrable Floating Rate Notes due 2019, Upgraded to
A1 (sf); previously on Feb 1, 2013 Upgraded to Ba3 (sf)
....EUR1.7M Class D-2 Senior
Subordinated Deferrable Fixed Rate Notes due 2019, Upgraded to A1
(sf); previously on Feb 1, 2013 Upgraded to Ba3 (sf)
....EUR4.5M Class S Combination Notes
due 2019, Upgraded to A1 (sf); previously on Feb 1, 2013
Upgraded to Ba2 (sf)
Moody's also affirmed the rating of the Class A-1 and Class A-2
notes issued by Adagio CLO I B.V.:
....EUR200M Class A-1 Senior Floating
Rate Notes (current balance is EUR 30.8M) due 2019, Affirmed
Aaa (sf); previously on Feb 1, 2013 Affirmed Aaa (sf)
....EUR7M Class A-2 Senior Fixed Rate
Notes (current balance is EUR 1.6M) due 2019, Affirmed Aaa
(sf); previously on Feb 1, 2013 Affirmed Aaa (sf)
Adagio CLO I B.V., issued in October 2004, 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 AXA Investment Managers Paris S.A.
This transaction has passed the reinvestment period in November 2009.
RATINGS RATIONALE
According to Moody's, the upgrades of the Class B, C and D
notes result primarily from significant amortisation. Since the
last rating action in February 2013, EUR 80.4M or 55%
of the underlying portfolio has amortised resulting in an increase in
overcollateralization ("OC") ratios.
In particular, the Class A-1 and A-2 notes have been
paid down by EUR 37.3M (18% of the original balance) in
total at the May 2013 payment date. As a consequence the OC ratios
of the all rated notes have improved. As of the latest trustee
report dated September 2013, the Class A/B, Class C and Class
D OC ratios are reported at 194.82%, 158.24%
and 129.08%, respectively, versus Jan 2013 reported
levels of 158.10%, 138.57% and 120.62%
respectively.
Furthermore, EUR 47.1M of the principal proceeds are available
as of the latest trustee report dated September 2013. At the next
payment date in November 2013, Moody's expects that the Class
A-1 and A-2 notes will be fully repaid and the OC ratios
of the Class B, Class C and Class D notes will increase and stand
in excess of 590%, 270% and 160% respectively.
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 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. Currently
the Rated Balance of the Combination Notes is more than covered by the
Class D balance.
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 analyzed the underlying collateral pool to have
a performing par and principal proceeds balance of EUR 112.7 million,
defaulted par of EUR 4.5 million, a weighted average default
probability of 22.9% (consistent with a WARF of 4,411),
a weighted average recovery rate upon default of 46.02%
for a Aaa liability target rating, a diversity score of 11 and a
weighted average spread of 3.62%. 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 88.63% 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 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:
Deterioration of credit quality to address the refinancing risks -
Approximately 30.6% of the portfolio is rated B3 and below
with maturities between 2013 and 2015, which may create challenges
for issuers to refinance. Moody's considered the scenario where
the WARF of the portfolio was increased to 4,788 by forcing to Ca
the credit quality of 50% of such exposures subject to refinancing
risk. This scenario generated model outputs that were up to one
notch lower than in the base case.
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 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 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, which may have significant
impact on the notes' ratings.
2) Moody's also notes that around 67.50% 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.
3) Foreign currency exposure: The deal has significant exposure
to non-EUR denominated assets. Volatilities in foreign exchange
rate will have a direct impact on interest and principal proceeds available
to the transaction, which may affect the expected loss of rated
tranches.
4) 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.
5) 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 such an asset has a liquidation value dependent on the nature
of the asset as well as the extent to which the asset's maturity
lags that of the liabilities. Realisation of higher than expected
liquidation values 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" 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
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 14 August 2013, Moody's released a report, which describes
how we propose to incorporate/assess 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" published in August 2013, https://www.moodys.com/research/Moodys-Approach-to-Capturing-Country-Risk-in-CLOs--PBS_SF337025>>;
Once the updated methodology is implemented, given the limited exposure
of to these countries in Adagio CLO I B.V., the ratings
of the notes affected by today's actions should not be impacted.
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.
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
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 upgrades EUR 60.25M of CLO notes of Adagio CLO I B.V.
