Rating Action: Moody's confirms ratings on two classes of notes issued by Venture XXIII CLO, Limited; actions conclude review
Global Credit Research - 19 Aug 2020
New York, August 19, 2020 -- Moody's Investors Service ("Moody's") has confirmed the ratings on the following notes issued by Venture XXIII CLO, Limited (the "CLO" or "Issuer"):
U.S.$24,100,000 Class D-R Mezzanine Secured Deferrable Floating Rate Notes due 2028 (the "Class D-R Notes"), Confirmed at Baa3 (sf); previously on April 17, 2020 Baa3 (sf) Placed Under Review for Possible Downgrade
U.S.$15,230,000 Class E-R Junior Secured Deferrable Floating Rate Notes due 2028 (the "Class E-R Notes"), Confirmed at Ba3 (sf); previously on April 17, 2020 Ba3 (sf) Placed Under Review for Possible Downgrade
The Class D-R Notes and the Class E-R Notes are referred to herein, collectively, as the "Confirmed Notes."
These actions conclude the reviews for downgrade initiated on April 17, 2020 on the Class D-R and Class E-R Notes issued by the CLO. The CLO, originally issued in July 2016 and refinanced in July 2018, 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 July 2020.
RATINGS RATIONALE
Despite the credit quality deterioration stemming from the coronavirus outbreak, Moody's concluded that the expected losses on the Confirmed Notes continue to be consistent with the notes' current rating after taking into account the CLO's latest portfolio, its relevant structural features and its actual over-collateralization (OC) levels. Consequently, Moody's has confirmed the ratings on the Confirmed Notes. According to the July 2020 trustee report[1], the weighted average rating factor (WARF) was reported at 2975, compared to 2701 reported in the March 2020 trustee report[2]. Moody's calculation also showed the WARF was failing the test level of 2801 reported in the July 2020 trustee report[3]. Based on Moody's calculation, the proportion of obligors in the portfolio with Moody's corporate family or other equivalent ratings of Caa1 or lower (adjusted for negative outlook or watchlist for downgrade) was approximately 16.49% as of July 2020. Nevertheless, Moody's noted that the OC tests for the Class D-R Notes and the Class E-R Notes, as well as the interest diversion test were recently reported[4] as passing.
Moody'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."
For modeling purposes, Moody's used the following base-case assumptions:
Performing par and principal proceeds balance: $388,182,192
Defaulted Securities: $7,955,993
Diversity Score: 105
Weighted Average Rating Factor (WARF): 3033
Weighted Average Life (WAL): 4.8 years
Weighted Average Spread (WAS): 3.64%
Weighted Average Recovery Rate (WARR): 46.89%
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 US economy gradually recovers in the second half of the year and 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 the US 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.
Factors that Would Lead to an Upgrade or Downgrade of the Ratings:
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 these ratings was "Moody's Global Approach to Rating Collateralized Loan Obligations" published in August 2020 and available at https://www.moodys.com/research/Moodys-Global-Approach-to-Rating-Collateralized-Loan-Obligations--PBS_1235535. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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.
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 08-Jul-2020
[2] Trustee report 10-Mar-2020
[3] Trustee report 08-Jul-2020
[4] Trustee report 08-Jul-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.
Yevgeniy Neverov Associate Lead Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 David H. Burger VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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