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Rating Action:

Moody's upgrades USD 15.3m CLO notes of Prospero CLO I B.V.

12 Nov 2013

Moody's also affirms USD 40.5m CLO notes

London, 12 November 2013 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by Prospero CLO I B.V.:

....USD 15,300,000 Class B Senior Secured Deferrable Interest Floating Rate Notes Due 2017, Upgraded to Aa2 (sf); previously on May 29 2013, Affirmed A1 (sf)

Moody's also affirmed the ratings of the following notes issued by Prospero CLO I B.V.:

....USD 130,250,000 (current balance USD 1,322,964.72) Class A-1-A Senior Secured Floating Rate Notes Due 2017, Affirmed Aaa (sf); previously on May 29, 2013 Affirmed Aaa (sf)

....EUR 35,600,000 (current balance EUR 361,593.43) Class A-1-B Senior Secured Floating Rate Notes Due 2017, Affirmed Aaa (sf); previously on May 29, 2013 Affirmed Aaa (sf)

....GBP 24,500,000 (current balance GBP 248,849.41) Class A-1-C Senior Secured Floating Rate Notes Due 2017, Affirmed Aaa (sf); previously on May 29, 2013 Affirmed Aaa (sf)

....USD 15,300,000 Class A-2 Senior Secured Floating Rate Notes Due 2017, Affirmed Aaa (sf); previously on May 29, 2013 Upgraded to Aaa (sf)

....USD 15,300,000 Class C Senior Secured Deferrable Interest Floating Rate Notes Due 2017, Affirmed Ba2 (sf); previously on May 29, 2013 Downgraded to Ba2 (sf)

....USD 7,700,000 Class D Senior Secured Deferrable Interest Floating Rate Notes Due 2017, Affirmed Caa2 (sf); previously on May 29, 2013 Downgraded to Caa2 (sf)

Prospero CLO I B.V., issued in April 2005, is a multi currency Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly high yield senior secured US and European loans managed by Alcentra Limited. This transaction passed its reinvestment period in March 2010.

RATINGS RATIONALE

According to Moody's, the upgrade of the Class B notes is primarily a result of the continued amortisation of the portfolio and subsequent increase in the collateralisation ratios since the last rating action in May 2013. Moody's notes that as of the September 2013 payment date, the Class A-1 notes have paid down by approximately USD 19.2 million (41%) since the last rating action in May 2013. As a result of this deleveraging, the overcollateralization ratios (or "OC ratios") of the senior notes have increased since the rating action in May 2013. As per the trustee report dated 13 September 2013, the Class A, Class B, Class C, and Class D ratios are reported at 208.46%, 154.06%, 122.17%, and 110.65% respectively, versus April 2013 levels of 169.46%, 136.16%, 113.79% and 105.10%. These OC ratios based on the September 2013 report do not take into account payments made from available principal proceeds on the September 2013 payment date. Reported WARF has marginally decreased from 2706 to 2698 between April 2013 and September 2013, while exposure to Caa assets has reduced from 12.2% to 7.7% during the same period.

Moody's notes the Oct 2013 trustee report has recently been issued. Reported diversity score and weighted average spread are materially unchanged from Sep 2013 data. Although October 2013 WARF is significantly higher compared to September 2013 data, this is largely because two restructured assets totalling approximately USD 5million earlier shown as defaulted are now classified as performing with Ca ratings with no impact on collateral pool credit quality. Moody's has incorporated into its analysis the receipt of an additional USD 4.6 million principal proceeds reported in Oct 2013.

Moody's also notes that the portfolio includes a number of investments in securities that mature after the maturity date of the notes. Based on the September 2013 trustee report, such securities currently total USD 9.45 million (15.4% of reported performing par) compared to USD 16.22 million (15.7% of reported performing par) in April 2013.

The majority of notes are denominated in USD, however the transaction has significant exposure to non-USD denominated assets. Volatilities in foreign exchange rates will have a direct impact on interest and principal proceeds available to the transaction, which may affect the expected loss of rated tranches, particularly the junior ones. Current par coverage of USD denominated liabilities by USD assets stands at 53% in September 2013 (after taking into account payments to be made on the notes from available principal proceeds on the September 2013 payment date) compared to 72% in April 2013. Non-USD liabilities are significantly over-collateralised by assets in the respective currencies.

In its base case, Moody's analyzed the underlying collateral pool to have a performing par and principal proceeds balance of USD 87.37 million, defaulted par of USD 7.53 million, a weighted average rating factor of 3472 (corresponding to a default probability of 18.69% over 2.5 years), a weighted average recovery rate upon default of 49.57% for a Aaa liability target rating, a diversity score of 16 and a weighted average spread of 3.21%. 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 91.66%% of the portfolio exposed to senior secured corporate assets would recover 50% upon default, 0.78% non first-lien loan corporate assets would recover 15%, and 7.56% of structured finance assets would recover 47.86%. 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 risk -- Approximately 8% of the portfolio consists of European corporate rated B3 and below and maturing between 2013 and 2015, which may create challenges for issuers to refinance. Moody's considered a model run where the base case WARF was increased to 3561 by forcing ratings on 25% of such exposure to Ca. This run generated model outputs that were consistent with 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 uncertainties of 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 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 deleveraging from unscheduled principal proceeds will continue and at what pace. Deleveraging 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. Typically, fast amortisation will benefit the ratings of the senior notes but may negatively impact the ratings of the mezzanine and junior notes.

2) Recoveries on 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). 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, particularly the junior ones.

Moody's notes that the portfolio is exposed 3.2% to obligors located in Ireland with a country ceiling of A3. On 14 August 2013, Moody's released a report, which describes how we propose to incorporate the additional risks 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/researchdocumentcontentpage.aspx?docid=PBS_SF337025. Once the updated methodology is implemented, given the limited exposure to these countries in Prospero CLO I B.V., the ratings of the notes affected by today's actions should not be impacted.

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 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.

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.

Raja Jawanteswara 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
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 USD 15.3m CLO notes of Prospero CLO I B.V.
No Related Data.
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