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RRE 4 Loan Management DAC -- Moody's assigns definitive ratings to three classes of notes issued by RRE 4 Loan Management DAC

·15 mins read

Rating Action: Moody's assigns definitive ratings to three classes of notes issued by RRE 4 Loan Management DAC

Global Credit Research - 27 Aug 2020

Frankfurt am Main, August 27, 2020 -- Moody's Investors Service ("Moody's") announced that it has assigned the following definitive ratings to notes issued by RRE 4 Loan Management DAC (the "Issuer"):

....EUR 232,000,000 Class A-1 Senior Secured Floating Rate Notes due 2032, Definitive Rating Assigned Aaa (sf)

....EUR 30,000,000 Class A-2-a Senior Secured Floating Rate Notes due 2032, Definitive Rating Assigned Aa2 (sf)

....EUR 10,000,000 Class A-2-b Senior Secured Fixed Rate Notes due 2032, Definitive Rating Assigned Aa2 (sf)

RATINGS RATIONALE

The rationale for the ratings is based on a consideration of the risks associated with the CLO's portfolio and structure as described in our methodology.

The Issuer is a managed cash flow CLO. At least 90% of the portfolio must consist of senior secured obligations and up to 10% of the portfolio may consist of senior unsecured obligations, second-lien loans, mezzanine obligations and high yield bonds. The portfolio is expected to be 97.5% ramped as of the closing date and to comprise of predominantly corporate loans to obligors domiciled in Western Europe.

Redding Ridge Asset Management (UK) LLP will manage the CLO. It will direct the selection, acquisition and disposition of collateral on behalf of the Issuer and may engage in trading activity, including discretionary trading, during the transaction's three-year reinvestment period. Thereafter, subject to certain restrictions, purchases are permitted using principal proceeds from unscheduled principal payments and proceeds from sales of credit risk obligations.

In addition to the three classes of notes rated by Moody's, the Issuer has issued EUR 45.6M Class B Senior Secured Deferrable Floating Rate Notes due 2032, EUR 26.0M Class C Senior Secured Deferrable Floating Rate Notes due 2032, EUR 14.0M Class D Senior Secured Deferrable Floating Rate Notes due 2032 and EUR 34.2M Subordinated Notes due 2120 which are not rated.

The transaction incorporates interest and par coverage tests which, if triggered, divert interest and principal proceeds to pay down the notes in order of seniority.

The rapid spread of the coronavirus outbreak, the government measures put in place to contain it and the deteriorating global economic outlook, have created a severe and extensive credit shock across sectors, regions and markets. Our analysis has considered the effect on the performance of corporate assets from the collapse in European economic activity in the second quarter and a gradual recovery in the second half of the year. However, that outcome depends on whether governments can reopen their economies while also safeguarding public health and avoiding a further surge in infections. 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 August 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1235535. Alternatively, 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:

The rated notes' performance is subject to uncertainty. The notes' performance is sensitive to the performance of the underlying portfolio, which in turn depends on economic and credit conditions that may change. The collateral manager's investment decisions and management of the transaction will also affect the notes' performance.

Moody's modeled the transaction using a cash flow model based on the Binomial Expansion Technique, as described in Section 2.3 of the "Moody's Global Approach to Rating Collateralized Loan Obligations" rating methodology published in August 2020.

Moody's used the following base-case modeling assumptions:

Par Amount: EUR 400,000,000

Diversity Score: 45*

Weighted Average Rating Factor (WARF): 3350

Weighted Average Spread (WAS): 3.6%

Weighted Average Coupon (WAC): 4.0%

Weighted Average Recovery Rate (WARR): 45.5%

Weighted Average Life (WAL): 8.5 years

*The covenanted base case diversity score is 46, however we have assumed a diversity score of 45 as the deal documentation allows for the diversity score to be rounded up to the nearest whole number whereas usual convention is to round down to the nearest whole number.

Moody's has addressed the potential exposure to obligors domiciled in countries with local currency ceiling (LCC) of A1 or below. As per the portfolio constraints and eligibility criteria, exposures to countries with LCC of A1 to A3 cannot exceed 10% and obligors cannot be domiciled in countries with LCC below A3.

Further details regarding Moody's analysis of this transaction may be found in the related new issue report, available soon on Moodys.com.

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.

Further information on the representations and warranties and enforcement mechanisms available to investors are available on http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1242388.

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_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Andreas Hellmut Botterbusch, CFA VP-Senior Analyst Structured Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Volker Gulde Senior Vice President/Manager Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Beka Bakuradze Associate Lead Analyst Structured Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454

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