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Rating Action:

Moody's upgrades rating on $82.5 million of CLO notes and downgrades rating on $5.5 million of CLO notes issued by Halcyon Loan Advisors Funding 2014-2 Ltd.

14 Mar 2018

Moody's also affirms the ratings on $429 million of notes

New York, March 14, 2018 -- Moody's Investors Service has upgraded the rating on the following notes issued by Halcyon Loan Advisors Funding 2014-2 Ltd.:

U.S.$82,500,000 Class A-2-R Senior Secured Floating Rate Notes Due April 2025, Upgraded to Aaa (sf); previously on April 28, 2017 Assigned Aa1 (sf)

Moody's also downgrades the rating on the following notes:

U.S.$5,500,000 Class E Senior Secured Deferrable Floating Rate Notes Due April 2025, Downgraded to Caa1 (sf); previously on April 28, 2014 Definitive Rating Assigned B2 (sf)

Moody's also affirmed the ratings on the following notes:

U.S.$220,000,000 Class A-1A-R Senior Secured Floating Rate Notes Due April 2025, Affirmed Aaa (sf); previously on April 28, 2017 Assigned Aaa (sf)

U.S.$110,000,000 Class A-1B-R Senior Secured Floating Rate Notes Due April 2025, Affirmed Aaa (sf); previously on April 28, 2017 Assigned Aaa (sf)

U.S.$38,500,000 Class B-R Senior Secured Deferrable Floating Rate Notes Due April 2025, Affirmed A2 (sf); previously on April 28, 2017 Assigned A2 (sf)

U.S.$33,000,000 Class C Senior Secured Deferrable Floating Rate Notes Due April 2025, Affirmed Baa3 (sf); previously on April 28, 2014 Definitive Rating Assigned Baa3 (sf)

U.S.$27,500,000 Class D Senior Secured Deferrable Floating Rate Notes Due April 2025, Affirmed Ba3 (sf); previously on April 28, 2014 Definitive Rating Assigned Ba3 (sf)

Halcyon Loan Advisors Funding 2014-2 Ltd., issued in April 2014 and refinanced in April 2017, is a collateralized loan obligation (CLO) backed primarily by a portfolio of senior secured loans. The transaction's reinvestment period will end in April 2018.

RATINGS RATIONALE

The upgrade and affirmation rating actions reflect the benefit of the limited period of time remaining before the end of the deal's reinvestment period in April 2018, and the expectation that deleveraging will commence shortly. The downgrade rating action on the Class E notes reflects the specific risks to the junior notes posed by par loss and credit deterioration observed in the underlying CLO portfolio. Based on Moody's calculations, the total collateral par balance, including expected recoveries on current defaults, is $533 million which is $17 million less than the $550 million initial par amount targeted during the deal's ramp-up. Furthermore, the weighted average spread (WAS) of the underlying portfolio has been decreasing and based on the February 2018 trustee report, the current level is 3.87% which is failing the covenant of 3.90%.

Methodology Underlying the Rating Action

The principal methodology used in these ratings 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 Ratings:

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 uncertainty about credit conditions in the general economy.

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 commence 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 could result in volatility in the deal's overcollateralization levels. Further, the timing of recovery realization and whether the Manager decides to work out or sell defaulted assets create additional uncertainty. Realization of recoveries that are either materially higher or lower than assumed in Moody's analysis would impact the CLO positively or negatively, respectively.

6) Post-Reinvestment Period Trading: Subject to certain requirements, the deal can reinvest certain proceeds after the end of the reinvestment period, and as such the manager has the ability to erode some of the collateral quality metrics to the covenant levels. Such reinvestment could affect the transaction either positively or negatively.

7) Weighted Average Spread (WAS): CLO performance can be sensitive to WAS, which is a key factor driving the amount of excess spread available as credit enhancement when a deal fails its over-collateralization or interest coverage tests. A decrease in excess spread, including as a result of losing the net interest benefit of LIBOR floors, or because market conditions make it difficult for the deal to source assets of appropriate credit quality in order to maintain its WAS target, would reduce the effective credit enhancement available for the notes.

8) Exposure to assets with low credit quality and weak liquidity: The historical default rate of assets rated Caa3 with a negative outlook, Caa2 or Caa3 on review for downgrade or the worst Moody's speculative grade liquidity (SGL) rating, SGL-4, is higher than the average. Exposure to such assets subject the notes to additional risks if these assets default.

In addition to the base case analysis, Moody's also conducted sensitivity analyses to test the impact of a number of default probabilities on the rated notes relative to the base case modeling results, which may be different from the current public ratings of the notes. Below is a summary of the impact of different default probabilities (expressed in terms of WARF) on all of the rated notes (by the difference in the number of notches versus the current model output, for which a positive difference corresponds to lower expected loss):

Moody's Adjusted WARF -- 20% (2177)

Class A-1A-R: 0

Class A-1B-R: 0

Class A-2-R: 0

Class B-R: +3

Class C: +3

Class D: +1

Class E: +3

Moody's Adjusted WARF + 20% (3265)

Class A-1A-R: 0

Class A-1B-R: 0

Class A-2-R: -1

Class B-R: -2

Class C: -1

Class D: -1

Class E: -2

Loss and Cash Flow Analysis:

Moody's modeled the transaction using a cash flow model based on the Binomial Expansion Technique, as described in "Moody's Global Approach to Rating Collateralized Loan Obligations."

The key model inputs Moody's used in its analysis, such as par, weighted average rating factor, diversity score 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 $526.3 million, defaulted par of $13.8 million, a weighted average default probability of 19.18% (implying a WARF of 2721), a weighted average recovery rate upon default of 47.85%, a diversity score of 70 and a weighted average spread of 3.88% (before accounting for LIBOR floors).

Moody's incorporates the default and recovery properties of the collateral pool in cash flow model analysis where they are subject to stresses as a function of the target rating on each CLO liability reviewed. Moody's derives the default probability from the credit quality of the collateral pool and Moody's expectation of the remaining life of the collateral pool. The average recovery rate for future defaults is based primarily on the seniority of the assets in the collateral pool. In each case, historical and market performance and the collateral manager's latitude for trading the collateral are also factors.

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.

Kristen Contrera
Associate Lead 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

Oktay Veliev
VP - Senior Credit Officer
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

No Related Data.
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