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Rating Action:

Moody's upgrades EUR 81.12m of SF CDO notes issued by ELM B.V. under Series 41

Global Credit Research - 14 Sep 2017

London, 14 September 2017 -- Moody's Investors Service ("Moody's"), announced today that it has upgraded the rating of the following notes issued by ELM B.V. under Series 41.

Issuer: ELM B.V.:

....EUR 84,000,000 (Current outstanding balance of EUR81.12M) Floating Rate Credit Linked Secured Notes due 2056, Upgraded to B3 (sf); previously on Aug 21, 2013 Downgraded to Caa2 (sf)

ELM B.V. Series 41 is a managed synthetic collateralized debt obligation backed primarily by a portfolio of euro dominated Structured Finance securities. At present, the portfolio is composed mainly of Prime RMBS (90.4%), Subprime RMBS (5.7%) and CMBS (3.9%). Series 41 is a first loss piece and currently has a thickness of 45%.

RATINGS RATIONALE

The rating action on the notes is primarily a result of an improvement in credit quality of the underlying reference portfolio since Jan 2016. The 10 year weighted average rating factor (or "WARF") has improved to 29.3 (equivalent to a Aa3 (sf) average rating) in August 2017 from 129.6 (equivalent to an A3 (sf) average rating) in January 2016.

The rated tranche is a first loss piece whose credit quality is directly influenced by that of the worst rated asset in the reference portfolio. Currently, the lowest rated performing asset is the Class A Notes of Magellan Mortgages No. 3 plc, rated A3 (sf) and represents 4.3% of the reference portfolio. In addition, 80% of the reference portfolio is rated Aa3 (sf) or higher. Therefore, the likelihood of further losses to the tranche is limited.

Moody's notes that Series 41 has realized a loss of EUR 2,881,402 (or 3.43% of the tranche notional amount) following a credit event on the Class A2 Notes of Deco 6 -- UK Large Loan 2 plc.

Moody's has taken into account the size of the loss as well as the credit quality of the reference portfolio in positioning the rating of Series 41.

Methodology Underlying the Rating Action:

The principal methodology used in this rating was "Moody's Approach to Rating SF CDOs" published in June 2017. Please see the Rating Methodologies 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 analysis on the key parameters for the rated notes:

Jump to Caa2 (sf) - Moody's considered a model run where the A3 (sf) rated asset in the reference portfolio was downgraded to Caa2 (sf). The model output for this run was three notches lower than the base-case model output.

This transaction is subject to a high level of macroeconomic uncertainty, which could negatively affect the ratings on the notes, in light of 1) uncertainty about credit conditions in the general economy 2) divergence in the legal interpretation of CDO documentation by different transactional parties due to or 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 prepayment levels or collateral sales by the collateral manager. Fast amortisation would usually benefit the ratings of the notes beginning with the notes having the highest prepayment priority.

In rating this transaction, Moody's used CDOROM to model the cash flows and determine the loss for each tranche. The Moody's CDOROM™ is a Monte Carlo simulation which takes the Moody's default probabilities as input. Each SF CDO reference asset is modelled individually with a standard multi-factor model incorporating intra- and inter-industry correlation. The correlation structure is based on a Gaussian copula. In each Monte Carlo scenario, defaults are simulated. Losses on the portfolio are then derived, and allocated to the notes in reverse order of priority to derive the loss on the notes issued by the Issuer. By repeating this process and averaging over the number of simulations, an estimate of the expected loss borne by the notes is derived. As such, Moody's analysis encompasses the assessment of stressed scenarios.

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.

In rating this transaction, Moody's CDOROM™ is used to model the expected loss for each tranche. Moody's CDOROM™ is a Monte Carlo simulation tool which takes each underlying asset default probability as input. Each underlying asset default behavior is then modeled individually with a standard multi-factor model incorporating both intra- and inter-industry correlation. The correlation structure is based on a Gaussian copula. Each Monte Carlo scenario simulates defaults and if applicable, recovery rates, to derive losses on a portfolio. For a synthetic transaction, the model then allocates losses to the tranches in reverse order of priority to derive the loss on the tranches. By repeating this process and averaging over the number of simulations, Moody's can derive the expected loss on the tranches. For a cash transaction, the portfolio loss, or default, distribution produced by Moody's CDOROM™ may be input into a separate cash flow model in accordance with its priority of payment to determine each tranche's expected loss.

Moody's did not use any stress scenario simulations in its analysis.

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 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.

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
Client Service: 44 20 7772 5454

Javier Hevia Portocarrero
VP - Senior Credit Officer
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

No Related Data.
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