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Rating Action:

Moody's upgrades ratings on EUR 272.3M CLO notes of Adagio III CLO P.L.C.

25 Jul 2014

Moody's also affirms EUR 130.6m notes

London, 25 July 2014 -- Moody's Investors Service announced today that it has upgraded the ratings of the following notes issued by ADAGIO III CLO P.L.C.:

....EUR38.3M Class A1B Senior Floating Rate Notes due 2022, Upgraded to Aaa (sf); previously on Oct 20, 2011 Confirmed at Aa2 (sf)

....EUR150M (Current Outstanding Balance EUR 132.4M) Class A3 Senior Floating Rate Notes due 2022, Upgraded to Aaa (sf); previously on Oct 20, 2011 Confirmed at Aa1 (sf)

....EUR25.8M Class B Senior Floating Rate Notes due 2022, Upgraded to Aa1 (sf); previously on Oct 20, 2011 Upgraded to A2 (sf)

....EUR31.5M Class C Senior Subordinated Deferrable Floating Rate Notes due 2022, Upgraded to A1 (sf); previously on Oct 20, 2011 Upgraded to Baa2 (sf)

....EUR28.5M Class D Senior Subordinated Deferrable Floating Rate Notes due 2022, Upgraded to Baa3 (sf); previously on Oct 20, 2011 Upgraded to Ba2 (sf)

....EUR17.5M (Current Outstanding Balance EUR 15.8M) Class E Senior Subordinated Deferrable Floating Rate Notes due 2022, Upgraded to Ba3 (sf); previously on Oct 20, 2011 Upgraded to B1 (sf)

....EUR6M (Current Rated Balance EUR 3.8M) Class W Combination Notes due 2022, Upgraded to Aa3 (sf); previously on Oct 20, 2011 Upgraded to Baa2 (sf)

Moody's also affirmed the ratings of the following notes issued by ADAGIO III CLO P.L.C.:

....EUR153M (Current Outstanding Balance EUR 130.6M) Class A1A Senior Floating Rate Notes due 2022, Affirmed Aaa (sf); previously on Feb 3, 2007 Definitive Rating Assigned Aaa (sf)

....EUR5M Class U Combination Notes due 2022, Affirmed Aa1 (sf); previously on Mar 28, 2013 Downgraded to Aa1 (sf)

ADAGIO III CLO P.L.C., issued in August 2006, is a multi-currency Collateralised Loan Obligation ("CLO") backed by a portfolio of mostly high yield senior secured European loans. The portfolio is managed by AXA Investment Managers Paris. The transaction ended its reinvestment period on 15 September 2013.


The rating actions on the notes are primarily a result of the improvement in over-collateralisation ("OC") ratios following the March 2014 payment date, when A1-A, A2 and A3 notes amortised by EUR 22.4M, EUR 2.3M and EUR 17.6M, respectively, or 14.7%, 11.7% and 11.7%, respectively, of their original balances, and the increase in principal proceeds balance to EUR 90.2M which will further increase the OC ratios following the next payment date in September 2014.

As of the trustee's June 2014 report, the Class A/B, Class C, Class D and Class E had OC ratios of 126.48%, 115.89%, 107.73% and 103.67%, respectively, compared with 124.13%, 114.78%, 107.47% and 103.79%, respectively, as of the trustee's February 2014 report.

The ratings on the combination notes address the repayment of the rated balance on or before the legal final maturity. For the Class W notes, the 'rated balance' at any time is equal to the principal amount of the combination note on the issue date times a rated coupon of 0.25% per annum accrued on the rated balance on the preceding payment date, minus the sum of all payments made from the issue date to such date, of either interest or principal. Class U is backed by an OAT Strip issued by the French Treasury.

The key model inputs Moody's uses, 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 EUR 374.72M and GBP 37.37M, defaulted par of EUR 19.49M, a weighted average default probability of 19.34% (consistent with a WARF of 2,606), a weighted average recovery rate upon default of 47.42% for a Aaa liability target rating, a diversity score of 32 and a weighted average spread of 4.21%. The GBP denominated assets are fully hedged with a macro swap, which Moody's also modelled.

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 92.64% of the portfolio exposed to first-lien senior secured corporate assets upon default and of 15% of the 7.36% 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 for a copy of this methodology.

Factors that would lead to an upgrade or downgrade of the rating:

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 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 due to 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 loan prepayment levels or collateral sales by 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.

2) Around 18.09% 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

3) 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.


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.

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

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 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 for additional regulatory disclosures for each credit rating.

Branimir Jovanovic
Associate 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 ratings on EUR 272.3M CLO notes of Adagio III CLO P.L.C.
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