Approximately $43.1 million of notes affected
New York, September 28, 2018 -- Moody's Investors Service has upgraded the rating on the following notes
issued by Eastland CLO, Ltd.:
U.S.$68,500,000 Class C Floating Rate
Senior Secured Deferrable Interest Extendable Notes Due 2022 (current
outstanding balance of $43,106,182.52),
Upgraded to A1 (sf); previously on August 11, 2017 Affirmed
Ba1 (sf)
Eastland CLO, Ltd., issued in March 2007, is
a collateralized loan obligation (CLO) backed primarily by a portfolio
of senior secured loans, with significant exposure to middle market
loans, CLO securities, illiquid loans and legacy defaulted
assets. The transaction's reinvestment period ended in May 2014.
RATINGS RATIONALE
This rating action is primarily a result of deleveraging of the senior
notes and an increase in the transaction's over-collateralization
(OC) ratios since August 2017. The Class A-3 and Class B
notes were paid down in full or by $78.9 million and the
Class C notes have been paid down by 37.1% or $25.4
million since that time. Based on trustee report calculations,
the OC ratios for the Class C and Class D notes are 222.34%
and 118.70%, respectively, versus August 2017
levels of 122.51% and 103.56%, respectively.
Nevertheless, the credit quality of the portfolio has deteriorated
since August 2017. Based on Moody's calculation, the weighted
average rating factor (WARF) is currently 4713 compared to 3384 at that
time. Moody's also notes that the deal holds a material par amount
of thinly traded or untraded loans, whose lack of liquidity may
pose additional risks especially for the subordinated notes relating to
the issuer's ultimate ability to pursue a liquidation of such assets,
especially if the sales can be transacted only at heavily discounted price
levels.
The portfolio includes a number of investments in securities that mature
after the notes do (long-dated assets). Based on Moody's
calculations, long-dated assets currently make up approximately
7.60% or $6.8 million of the portfolio.
These investments could expose the notes to market risk in the event of
liquidation when the notes mature.
Methodology Underlying the Rating Action:
The principal methodology used in this rating was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in August 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:
This transaction is subject to a number of factors and circumstances that
could lead to either an upgrade or downgrade of the ratings:
1) Macroeconomic uncertainty: CLO performance is subject to a) uncertainty
about credit conditions in the general economy and b) the large concentration
of upcoming speculative-grade debt maturities, which could
make refinancing difficult for issuers.
2) Collateral Manager: Performance can also be affected positively
or negatively by a) the manager's investment strategy and behavior and
b) differences in the legal interpretation of CLO documentation by different
transactional parties owing to embedded ambiguities.
3) Collateral credit risk: A shift towards collateral of better
credit quality, or better credit performance of assets collateralizing
the transaction than Moody's current expectations, can lead to positive
CLO performance. Conversely, a negative shift in credit quality
or performance of the collateral can have adverse consequences for CLO
performance.
4) Deleveraging: An important source of uncertainty in this transaction
is whether deleveraging from unscheduled principal proceeds will continue
and at what pace. Deleveraging of the CLO could accelerate owing
to high prepayment levels in the loan market and/or collateral sales by
the manager, which could have a significant impact on the notes'
ratings. Note repayments that are faster than Moody's current expectations
will usually have a positive impact on CLO notes, beginning with
those with the highest payment priority.
5) Recovery of defaulted assets: Fluctuations in the market value
of defaulted assets reported by the trustee and those that Moody's assumes
as having defaulted could result in volatility in the deal's OC levels.
Further, the timing of recoveries and whether a manager decides
to work out or sell defaulted assets create additional uncertainty.
Realization of higher than assumed recoveries would positively impact
the CLO.
6) Long-dated and illiquid assets: Repayment of the notes
at their maturity will be highly dependent on the issuer's successful
monetization of illiquid assets and those that mature after the CLO's
legal maturity date (long-dated assets). This risk in turn
may be contingent upon issuer's ability and willingness to sell these
assets. This risk is borne first by investors with the lowest priority
in the capital structure. However, actual long-dated
and illiquid asset exposures and prevailing market prices and conditions
at the time of liquidation will drive the deal's actual losses,
if any.
7) Exposure to credit estimates: The deal has exposure to securities
whose default probabilities Moody's has assessed through credit estimates.
Moody's normally updates such estimates at least once annually,
but if such updates do not occur, the transaction could be negatively
affected by any default probability adjustments Moody's assumes in lieu
of updated credit estimates.
8) Exposure to CLO securities: The portfolio includes a material
concentration in CLO securities. Moody's views CLOs as highly correlated,
and the specific CLO securities that the issuer has invested in have longer
maturities and are of relatively better average credit quality than the
loans in the portfolio. As the deal further seasons and amortizes,
the CLO securities, currently representing 15.46%
of the total collateral, might comprise a larger proportion of the
portfolio. Conversely, if a larger portion of the CLO tranches
are redeemed, the corporate loan collateral that has a relatively
worse average credit quality, might comprise a larger proportion
of the portfolio, in each case requiring reconsideration of the
transaction's risk.
9) Lack of portfolio granularity: The performance of the portfolio
depends to a large extent on the credit conditions of a few large obligors
Moody's rates Caa1 or lower, especially if they jump to default.
Because of the deal's low diversity score and lack of granularity,
Moody's analyzed the deal with a simulated default distribution using
its CDOROM™ software.
Loss and Cash Flow Analysis:
Because of the collateral pool's low diversity score, Moody's used
CDOROM™ to simulate a default distribution that it then used as
an input in the cash flow model, as described in "Moody's Global
Approach to Rating Collateralized Loan Obligations." In addition,
Moody's ran a supplementary analysis modeling the transaction using a
cash flow model based on the Binomial Expansion Technique.
The key model inputs Moody's used in its analysis, such as par,
weighted average rating factor and the weighted average recovery rate,
are based on its published methodology and could differ from the trustee's
reported numbers. In its base case, Moody's analyzed the
collateral pool as having a performing par and principal proceeds balance
of $89.51 million, defaulted par of $32.48
million, a weighted average default probability of 27.76%
(implying a WARF of 4713), a weighted average recovery rate upon
default of 45.45% and a weighted average spread of 3.69%
(before accounting for LIBOR floors).
A material proportion of the collateral pool includes debt obligations
whose credit quality Moody's assesses through credit estimates.
Moody's analysis reflects adjustments with respect to the default probabilities
associated with credit estimates. Specifically, Moody's assumed
an equivalent of Caa3 for assets with credit estimates that have not been
updated within the last 15 months, which represent approximately
30.68% of the collateral pool.
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.
Moody's describes its loss and cash flow analysis in the section
"Ratings Rationale" of this press release.
Moody's quantitative analysis entails an evaluation of scenarios
that stress factors contributing to sensitivity of ratings and take into
account the likelihood of severe collateral losses or impaired cash flows.
Moody's weights the impact on the rated instruments based on its
assumptions of the likelihood of the events in such scenarios occurring.
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.
Kevin Anthony
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Leon Mogunov
Associate Managing Director
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
