Moody's also affirms the ratings on EUR 255.5m of Notes
London, 29 January 2021 -- Moody's Investors Service ("Moody's") has upgraded the ratings on the
following Notes issued by Cairn CLO VI DAC:
....EUR 42,100,000 Class B-R
Senior Secured Floating Rate Notes due 2029, Upgraded to Aa1 (sf);
previously on Dec 8, 2020 Aa2 (sf) Placed Under Review for Possible
Upgrade
....EUR 19,600,000 Class C-R
Senior Secured Deferrable Floating Rate Notes due 2029, Upgraded
to A1 (sf); previously on Dec 8, 2020 A2 (sf) Placed Under
Review for Possible Upgrade
Moody's has also affirmed the ratings on the following notes:
....EUR 212,000,000 (Current Outstanding
Amount EUR 205,626,000) Class A-R Senior Secured Floating
Rate Notes due 2029, Affirmed Aaa (sf); previously on Jun 30,
2020 Affirmed Aaa (sf)
....EUR 17,150,000 Class D-R
Senior Secured Deferrable Floating Rate Notes due 2029, Affirmed
Baa2 (sf); previously on Jun 30, 2020 Confirmed at Baa2 (sf)
....EUR 24,000,000 Class E-R
Senior Secured Deferrable Floating Rate Notes due 2029, Affirmed
Ba2 (sf); previously on Jun 30, 2020 Confirmed at Ba2 (sf)
....EUR 8,700,000 Class F-R
Senior Secured Deferrable Floating Rate Notes due 2029, Affirmed
B3 (sf); previously on Jun 30, 2020 Downgraded to B3 (sf)
Cairn CLO VI DAC, issued in July 2016 and refinanced in July 2018,
is a collateralised loan obligation (CLO) backed by a portfolio of mostly
high-yield senior secured European loans. The portfolio
is managed by Cairn Loan Investments LLP. The transaction's
reinvestment period ended in July 2020.
Today's action concludes the rating review on the Classes B-R and
C-R Notes initiated on 8 December 2020, "Moody's upgrades
23 securities from 11 European CLOs and places ratings of 117 securities
from 44 European CLOs on review for possible upgrade.",
http://www.moodys.com/viewresearchdoc.aspx?docid=PR_437186.
RATINGS RATIONALE
The rating upgrades on the Class B-R and C-R Notes are primarily
due to the update of Moody's methodology used in rating CLOs,
which resulted in a change in overall assessment of obligor default risk
and calculation of weighted average rating factor (WARF). Based
on Moody's calculation, the WARF is currently 2964 after applying
the revised assumptions as compared to the trustee reported WARF of 3310
as of 15 December 2020 [1].
The rating affirmations on the Class A-R, D-R,
E-R and F-R Notes reflect the expected losses of the Notes
continuing to remain consistent with their current ratings after taking
into account the CLO's latest portfolio, its relevant structural
features and its actual over-collateralization (OC) levels as well
as applying Moody's revised CLO assumptions.
Moody's notes that the January 2021 trustee report was published at the
time it was completing its analysis of the December 2020 data.
Key portfolio metrics such as WARF, diversity score, weighted
average spread and life, and OC ratios exhibit little or no change
between these dates.
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 used the following assumptions:
Performing par and principal proceeds balance: EUR 336.0m
Defaulted Securities: EUR 7.3m
Diversity Score: 40
Weighted Average Rating Factor (WARF): 2964
Weighted Average Life (WAL): 4.8 years
Weighted Average Spread (WAS) (before accounting for Euribor floors):
3.7%
Weighted Average Coupon (WAC): 4.5%
Weighted Average Recovery Rate (WARR): 45.9%
Par haircut in OC tests and interest diversion test: 0%
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.
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 analysing.
Moody's notes that the credit quality of the CLO portfolio has deteriorated
over the last year as a result of economic shocks stemming from the coronavirus
outbreak. Corporate credit risk remains elevated, and Moody's
projects that default rates will continue to rise through the first quarter
of 2021. Although recovery is underway in the US and Europe,
it is a fragile one beset by unevenness and uncertainty. As a result,
Moody's analyses continue to take into account a forward-looking
assessment of other credit impacts attributed to the different trajectories
that the US and European economic recoveries may follow as a function
of vaccine development and availability, effective pandemic management,
and supportive government policy responses.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Our analysis
has considered the effect on the performance of corporate assets from
the current weak global economic activity and a gradual recovery for the
coming months. Although an economic recovery is underway,
it is tenuous and its continuation will be closely tied to containment
of the virus. As a result, the degree of uncertainty around
our forecasts is unusually high.
We regard the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was "Moody's Global
Approach to Rating Collateralized Loan Obligations" published in December
2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1242167.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Counterparty Exposure:
Today's rating action took into consideration the Notes' exposure to relevant
counterparties, such as account bank and swap provider, using
the methodology "Moody's Approach to Assessing Counterparty Risks
in Structured Finance" published in June 2020. Moody's concluded
the ratings of the Notes are not constrained by these risks.
Factors that would lead to an upgrade or downgrade of the ratings:
This transaction is subject to a high level of macroeconomic uncertainty,
which could negatively affect the ratings on the Notes, in light
of uncertainty about credit conditions in the general economy.
In particular, the length and severity of the economic and credit
shock precipitated by the global coronavirus pandemic will have a significant
impact on the performance of the securities. 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
CLO's reinvestment criteria after the end of the reinvestment period,
both of which can 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.
• 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. 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 in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
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, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
REFERENCES/CITATIONS
[1] Trustee report 15-Dec-2020
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.
Alejandro Gomar Beltran
Associate Lead Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Ian Perrin
Associate Managing Director
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 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
Client Service: 44 20 7772 5454
