Limerock CLO III, Ltd. -- Moody's upgrades rating on one class of notes issued by Limerock CLO III, Ltd.; action concludes review

Rating Action: Moody's upgrades rating on one class of notes issued by Limerock CLO III, Ltd.; action concludes reviewGlobal Credit Research - 05 Feb 2021New York, February 05, 2021 -- Moody's Investors Service ("Moody's") has upgraded the rating on the following notes issued by Limerock CLO III, Ltd. (the "CLO" or "Issuer"):U.S. $33,000,000 Class C Deferrable Mezzanine Secured Floating Rate Notes due 2026 (the "Class C Notes"), Upgraded to A1 (sf); previously on December 8, 2020 A2 (sf) Placed Under Review for Possible UpgradeThe Class C Notes are referred to herein as the "Upgraded Notes."This action concludes the review for upgrade initiated on December 8, 2020 on the Class C Notes issued by the CLO. The CLO, originally issued in November 2014 and partially refinanced in February 2017, is a managed cashflow CLO. The notes are collateralized primarily by a portfolio of broadly syndicated senior secured corporate loans. The transaction's reinvestment period ended in October 2018.RATINGS RATIONALEThe upgrade action taken on the Upgraded Notes is primarily a result of applying Moody's revised CLO assumptions described in "Moody's Global Approach to Rating Collateralized Loan Obligations" published in December 2020. The primary changes to the modeling assumptions include the analytical treatment of corporate obligors whose ratings are on review downgrade or assigned a negative outlook. Specifically, we now adjust the obligor's Moody's Default Probability Rating down by one notch if the obligor's rating is on review for possible downgrade and we make no adjustments if the obligor's rating has a negative outlook. Based on these updates, Moody's calculated WARF on the portfolio is now 2971 compared to the WARF of 3317 as reported on trustee's January 2021 report[1].The upgrade action is also a result of deleveraging of the senior notes and an increase in the transaction's over-collateralization (OC) ratios since October 2020. The Class A-1-R notes have been paid down by approximately 28.7% or $21.9 million since October 2020. Based on the trustee's January 2021 report[2], the OC ratios for the Class A, Class B, Class C and Class D notes are reported at 175.81%, 147.77%, 122.06% and 104.68%, respectively, versus trustee's October 2020 reported [3]levels of 168.81%, 143.89%, 120.42% and 104.20%, respectively. Moody's notes that the Jan 2021 trustee reported [4] OC ratios above do not account for the $21.9 million payment to the Class A Notes on the Jan 20, 2021 payment dateMoody'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, weighted average spread and the weighted average recovery rate, are based on its published methodology and could differ from the trustee's reported numbers or the metrics calculated based on the current portfolio.For modeling purposes, Moody's used the following base-case assumptions:Performing par and principal proceeds balance: $210,289,745Defaulted Securities: $3,453,010Diversity Score: 58Weighted Average Rating Factor (WARF): 2971Weighted Average Life (WAL): 3.41 yearsWeighted Average Spread (WAS) (before accounting for LIBOR floors): 3.23%Weighted Average Recovery Rate (WARR): 49.02%Par haircut in OC tests and interest diversion test: 0.71%In consideration of the current high uncertainties around the global economy, and the ultimate performance of the CLO portfolio, Moody's conducted a number of additional sensitivity analyses representing a range of outcomes that could diverge, both to the downside and the upside, from our base case. Some of the additional scenarios that Moody's considered in its analysis of the transaction include, among others: additional near-term defaults of companies facing liquidity pressure; sensitivity analysis on deteriorating credit quality due to a large exposure to loans with negative outlook, and a lower recovery rate assumption on defaulted assets to reflect declining loan recovery rate expectations.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 US 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.Factors that would Lead to an Upgrade or Downgrade of the Rating:The performance of the rated notes is subject to uncertainty in the performance of the related CLO's underlying portfolio, which in turn depends on economic and credit conditions that may change. 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. The CLO manager's investment decisions and management of the transaction will also affect the performance of the rated securities.The principal methodology used in this rating was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in December 2020 and available at https://www.moodys.com/viewresearchdoc.aspx?docid=PBS_1242167. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is 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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] Trustee report 07-Jan-2021[2] Trustee report 07-Jan-2021[3] Trustee report 07-Oct-2020[4] Trustee report 07-Jan-2021Please 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. 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