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St. Paul's CLO VII DAC -- Moody's confirms the ratings on EUR 56.25m CLO notes issued by St. Paul's CLO VII D.A.C.

·19 mins read

Rating Action: Moody's confirms the ratings on EUR 56.25m CLO notes issued by St. Paul's CLO VII D.A.C.

Global Credit Research - 26 Aug 2020

Moody's also affirms the ratings on EUR 313.75m of Notes

Frankfurt am Main, August 26, 2020 -- Moody's Investors Service ("Moody's) has confirmed the ratings on the following notes issued by St. Paul's CLO VII D.A.C.:

....EUR 21,000,000 Class D Senior Secured Deferrable Floating Rate Notes due 2030, Confirmed at Baa2 (sf); previously on Jun 3, 2020 Baa2 (sf) Placed Under Review for Possible Downgrade

....EUR 25,250,000 Class E Senior Secured Deferrable Floating Rate Notes due 2030, Confirmed at Ba2 (sf); previously on Jun 3, 2020 Ba2 (sf) Placed Under Review for Possible Downgrade

....EUR 10,000,000 Class F Senior Secured Deferrable Floating Rate Notes due 2030, Confirmed at B2 (sf); previously on Jun 3, 2020 B2 (sf) Placed Under Review for Possible Downgrade

Moody's has also affirmed the ratings on the following notes:

....EUR 229,400,000 Class A-1 Senior Secured Floating Rate Notes due 2030, Affirmed Aaa (sf); previously on Jul 12, 2018 Assigned Aaa (sf)

....EUR 10,600,000 Class A-2 Senior Secured Fixed Rate Notes due 2030, Affirmed Aaa (sf); previously on Jul 12, 2018 Assigned Aaa (sf)

....EUR 23,150,000 Class B-1 Senior Secured Floating Rate Notes due 2030, Affirmed Aa2 (sf); previously on Jul 12, 2018 Assigned Aa2 (sf)

....EUR 9,500,000 Class B-2 Senior Secured Fixed Rate Notes due 2030, Affirmed Aa2 (sf); previously on Jul 12, 2018 Assigned Aa2 (sf)

....EUR 21,100,000 Class B-3 Senior Secured Floating Rate Notes due 2030, Affirmed Aa2 (sf); previously on Jul 12, 2018 Assigned Aa2 (sf)

....EUR 5,000,000 Class C-1 Senior Secured Deferrable Floating Rate Notes due 2030, Affirmed A2 (sf); previously on Jul 12, 2018 Assigned A2 (sf)

....EUR 15,000,000 Class C-2 Senior Secured Deferrable Floating Rate Notes due 2030, Affirmed A2 (sf); previously on Jul 12, 2018 Assigned A2 (sf)

St. Paul's CLO VII D.A.C., originally issued in March 2017, reissued 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 Intermediate Capital Managers Limited. The transaction's reinvestment period will end in 30 April 2021.

RATINGS RATIONALE

Today's action concludes the rating review on the Classes D, E and F notes initiated on 3 June 2020 as a result of the deterioration of the credit quality and/or the reduction of the par amount of the portfolio following from the coronavirus outbreak, "Moody's places ratings on 234 securities from 77 EMEA CLOs on review for possible downgrade", http://www.moodys.com/viewresearchdoc.aspx?docid=PR_425508.

The credit quality has deteriorated as reflected in the increase in Weighted Average Rating Factor (WARF), in the defaulted par amount in the portfolio and in the proportion of obligations from issuers with ratings of Caa1 or lower.

The trustee reported WARF worsened by about 6.3% to 3391 [1] from 3191 [2] in January 2020 and is now significantly above the reported covenant of 3100 [1]. The trustee reported default amounts increased to EUR 13.69 million [1] from zero [2] in January 2020.

The trustee reported securities with default probability ratings of Caa1 or lower have increased to 9.7% [1] from 7.6% [2] in January 2020. An over-collateralisation (OC) haircut of EUR 4.6 million to the computation of the OC tests is applied.

In addition, the over-collateralisation (OC) levels have weakened across the capital structure. According to the trustee report dated July 2020 the Class A/B, Class C, Class D, Class E and Reinvestment test ratios are reported at 132.9% [1], 124.4% [1], 116.6% [1], 108.4% [1], 105.5%[1] compared to January 2020 levels of 136.6%[2], 127.9%[2], 119.9%[2], 111.5% [2] and 108.5%[2] , respectively.

Moody's notes that none of the OC tests are currently in breach and the transaction remains in compliance with the following collateral quality tests: Diversity Score, Weighted Average Recovery Rate (WARR) and Weighted Average Spread (WAS).

Despite the credit quality deterioration stemming from the coronavirus outbreak, Moody's concluded that the expected losses on all the rated notes remain consistent with their current ratings following the analysis of the CLO's latest portfolio its relevant structural features and its actual over-collateralisation levels. Consequently, Moody's has confirmed the ratings on the Class D, E and F notes and affirmed the ratings on the Class A-1, A-2, B-1, B-2, B-3, C-1 and C-2 notes.

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 EUR 389.5 million, a defaulted par of EUR 13.7 million, a weighted average default probability of 25.51% (consistent with a WARF of 3389 over a weighted average life of 4.76 years), a weighted average recovery rate upon default of 45.3% for a Aaa liability target rating, a diversity score of 53 and a weighted average spread of 3.76%.

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.

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; additional OC par haircuts to account for potential future downgrades and defaults resulting in an increased likelihood of cash flow diversion to senior notes; and some improvement in WARF as the global economy gradually recovers in the second half of the year and future corporate credit conditions generally stabilize.

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 global 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.

Counterparty Exposure:

Today's rating action took into consideration the notes' exposure to relevant counterparties, such as account bank and swap providers, 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 note, 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; (2) divergence in the legal interpretation of CDO documentation by different transactional parties because of embedded ambiguities; and (3) the additional expected loss associated with hedging agreements in this transaction which may also impact the ratings negatively.

Additional uncertainty about performance is due to the following:

** Weighted average life: The notes' ratings are sensitive to the weighted average life assumption of the portfolio, which could lengthen as a result of the manager's decision to reinvest in new issue loans or other loans with longer maturities, or participate in amend-to-extend offerings. The effect on the ratings of extending the portfolio's weighted average life can be positive or negative depending on the notes' seniority.

** Other collateral quality metrics: Because the deal can reinvest, the manager can erode the collateral quality metrics' buffers against the covenant levels.

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_1133569.

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

REFERENCES/CITATIONS

[1] Trustee report July-2020

[2] Trustee report January-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.

Wei Jiao, CFA Asst Vice President - 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 Ian Perrin Associate Managing Director 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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