Moody's also affirms the ratings of EUR 63.85 million CLO notes
London, 21 March 2014 -- Moody's Investors Service has upgraded the rating on the following notes
issued by Harvest CLO I S.A.:
....EUR32.5M Class C Senior Subordinated
Deferrable Floating Rate Notes due 2017, Upgraded to Aa1 (sf);
previously on Sep 20, 2013 Upgraded to A2 (sf)
Moody's also affirmed the ratings of the following notes issued by Harvest
CLO I S.A.:
....EUR13.6M (outstanding balance of
EUR 7,807,157.85) Class B-1 Senior Fixed Rate
Notes due 2017, Affirmed Aaa (sf); previously on Sep 20,
2013 Upgraded to Aaa (sf)
....EUR31.4M (outstanding balance of
EUR 18,025,349.73) Class B-2 Senior Floating
Rate Notes due 2017, Affirmed Aaa (sf); previously on Sep 20,
2013 Upgraded to Aaa (sf)
....EUR22.5M Class D Senior Subordinated
Deferrable Floating Rate Notes due 2017, Affirmed Ba2 (sf);
previously on Sep 20, 2013 Upgraded to Ba2 (sf)
....EUR11.5M Class E Senior Subordinated
Deferrable Floating Rate Notes due 2017, Affirmed Caa1 (sf);
previously on Sep 20, 2013 Affirmed Caa1 (sf)
....EUR6M (outstanding balance of EUR 4,021,093.7)
Class Q Combination Notes due 2017, Affirmed Ba2 (sf); previously
on Sep 20, 2013 Upgraded to Ba2 (sf)
Harvest CLO I S.A., issued in April 2004, is
a collateralised Loan Obligation ("CLO") backed by a portfolio of mostly
high yield European and US loans. The portfolio is managed by 3i
Debt Management Investments Ltd. The transaction's reinvestment
period ended in March 2009.
RATINGS RATIONALE
The rating action on the notes is primarily a result of an improvement
in the overcollateralization ratio of the rated notes pursuant to amortisation
of the portfolio. The Class A notes have been paid down in full
and the Class B notes have been redeemed by approximately EUR 19.2
million (42.6%) at the September 2013 payment date.
As a result of the deleveraging, the overcollateralization (OC)
ratios of the tranches have increased. According to the January
2014 trustee report the OC ratios of Classes B, C, D and E
are 348%, 154%, 111%, 97%
compared to 175%, 131%, 111%, 104%
respectively in September 2013 at the previous rating action.
The affirmation of the ratings of Classes D and E notes is based on the
relative stability of the OC ratios and slight deterioration of the general
credit quality of the remaining assets as reflected by the average credit
rating of the portfolio (measured by the weighted average rating factor,
or WARF). Further, the proportion of securities from issuers
with ratings of Caa1 or lower has slightly increased. According
to the January 2014 trustee report the WARF is 3788, compared with
3388 considered at the previous rating action in September 2013.
Securities rated of Caa1 or lower currently make up approximately 35.6%
of the underlying portfolio, versus 10.3% at previous
rating action.
The rating on the combination notes address the repayment of the rated
balance on or before the legal final maturity. For the Class Q
notes, the 'rated balance' at any time is equal to the
principal amount of the combination note on the issue date minus the sum
of all payments made from the issue date to such date, of either
interest or principal. The rated balance will not necessarily correspond
to the outstanding notional amount reported by the trustee.
The key model inputs Moody's uses 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 analysed the underlying collateral pool as having
a performing par and principal proceeds balance of EUR97 million,
defaulted par of EUR1 million, a weighted average default probability
of 27.1% (consistent with a WARF of 5228), a weighted
average recovery rate upon default of 42.1% for a Aaa liability
target rating, a diversity score of 15 and a weighted average spread
of 3.64%.
In its base case, Moody's addresses the exposure to obligors domiciled
in countries with local currency country risk bond ceilings (LCCs) of
A1 or lower. Given that the portfolio has exposures to 14.1%
of obligors in Spain whose LCC is A1, Moody's ran the model
with different par amounts depending on the target rating of each class
of notes, in accordance with Section 4.2.11 and Appendix
14 of the methodology. The portfolio haircuts are a function of
the exposure to peripheral countries and the target ratings of the rated
notes, and amount to 1.1% for the Class C notes.
No haircut was applied for the Classes D and E notes.
The default probability derives from the credit quality of the collateral
pool and Moody's expectation of the remaining life of the collateral
pool. The estimated average recovery rate 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 a recovery
of 50% of the 77.3% of the portfolio exposed to first-lien
senior secured corporate assets upon default and of 15% of the
remaining non-first-lien loan corporate assets upon default.
In each case, historical and market performance and a collateral
manager's latitude to trade collateral are also relevant factors.
Moody's incorporates these default and recovery characteristics
of the collateral pool into its cash flow model analysis, subjecting
them to stresses as a function of the target rating of each CLO liability
it is analyzing.
Methodology Underlying the Rating Action:
The principal methodology used in this rating was "Moody's Global Approach
to Rating Collateralized Loan Obligations" published in February 2014.
Please see the Credit Policy 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 analyses on the key parameters for the rated notes,
for which it assumed lower credit quality in the portfolio to address
refinancing risk. Loans to European corporates rated B3 or lower
and maturing between 2014 and 2015 make up approximately 15% of
the portfolio, which could make refinancing difficult. Moody's
ran a model in which it raised the base case WARF to 5309 by forcing ratings
on 25% of the refinancing exposures to Ca; the model generated
outputs that were within one notch of the base-case results.
Moody's also conducted another sensitivity analysis where an additional
10% of the par amount was assumed defaulted; the model generated
outputs that were within one notch of the base-case results except
for Class E where the output was three notches lower.
This transaction is subject to a high level of macroeconomic uncertainty,
which could negatively affect the ratings on the note, in light
of 1) uncertainty about credit conditions in the general economy and 2)
the concentration of lowly-rated debt maturing between 2014 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 the legal interpretation of CDO documentation by
different transactional parties because of embedded ambiguities.
Additional uncertainty about performance is due to the following:
• 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 loan prepayment levels or collateral
sales by the liquidation agent/the collateral manager or be delayed by
an increase in loan amend-and-extend restructurings.
Fast amortisation would usually benefit the ratings of the notes beginning
with the notes having the highest prepayment priority.
• Around 73.97% of the collateral pool consists of
debt obligations whose credit quality Moody's has assessed by using
credit estimates. As part of its base case, Moody's
has stressed large concentrations of single obligors bearing a credit
estimate as described in "Updated Approach to the Usage of Credit Estimates
in Rated Transactions," published in October 2009 and available
at https://www.moodys.com/research/Updated-Approach-to-the-Usage-of-Credit-Estimates-in-Rated--PBC_120461.
• 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, the liquidation value of such an asset will depend on
the nature of the asset as well as the extent to which the asset's
maturity lags that of the liabilities. Liquidation values higher
than Moody's expectations would have a positive impact on the notes'
ratings
• Recovery of defaulted assets: Market value fluctuations in
trustee-reported defaulted assets and those Moody's assumes
have defaulted can result in volatility in the deal's over-collateralisation
levels. Further, the timing of recoveries and the manager's
decision whether to work out or sell defaulted assets can also result
in additional uncertainty. Moody's analysed defaulted recoveries
assuming the lower of the market price or the recovery rate to account
for potential volatility in market prices. Recoveries higher than
Moody's expectations would have a positive impact on the notes'
ratings.
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.
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.
The analysis relies on an assessment of collateral characteristics to
determine the collateral loss distribution, that is, the function
that correlates to an assumption about the likelihood of occurrence to
each level of possible losses in the collateral. As a second step,
Moody's evaluates each possible collateral loss scenario using a
model that replicates the relevant structural features to derive payments
and therefore the ultimate potential losses for each rated instrument.
The loss a rated instrument incurs in each collateral loss scenario,
weighted by assumptions about the likelihood of events in that scenario
occurring, results in the expected loss of the rated instrument.
The analysis includes an assessment of collateral characteristics and
performance to determine the expected collateral loss or a range of expected
collateral losses or cash flows to the rated instruments. As a
second step, Moody's estimates expected collateral losses or cash
flows using a quantitative tool that takes into account credit enhancement,
loss allocation and other structural features, to derive the expected
loss for each rated instrument.
In rating this transaction, Moody's used a cash flow model
to model cash flow stress scenarios to determine the extent to which investors
would receive timely payments of interest and principal in the stress
scenarios, given the transaction structure and collateral composition.
As the section on loss and cash flow analysis describes, 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 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.
Bongani Dlamini
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
SUBSCRIBERS: 44 20 7772 5454
Neelam S Desai
Senior Vice President/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 rating on EUR 32.5m CLO notes of Harvest CLO I S.A.
