Rating Action: Moody's downgrades ratings of notes issued by Vibrant CLO III, Ltd.; actions conclude review
Global Credit Research - 04 Aug 2020
Approximately $55.0 million of notes affected
New York, August 04, 2020 -- Moody's Investors Service ("Moody's") has downgraded the ratings on the following notes issued by Vibrant CLO III, Ltd. (the "CLO" or "Issuer"):
U.S.$31,000,000 Class C-RR Mezzanine Secured Deferrable Floating Rate Notes due 2031 (the "Class C-RR Notes"), Downgraded to Ba1 (sf); previously on April 17, 2020 Baa3 (sf) Placed Under Review for Possible Downgrade
U.S.$24,000,000 Class D-RR Mezzanine Secured Deferrable Floating Rate Notes due 2031 (the "Class D-RR Notes"), Downgraded to B1 (sf); previously on April 17, 2020 Ba3 (sf) Placed Under Review for Possible Downgrade
These actions conclude the review for downgrade initiated on April 17, 2020 on the Class C-RR Notes, and Class D-RR Notes. The CLO, originally issued in March 2015 and fully refinanced in December 2016 and subsequently in October 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 will end in October 2023.
RATINGS RATIONALE
The downgrades on the Class C-RR Notes and Class D-RR Notes reflect the risks posed by credit deterioration and loss of collateral coverage observed in the underlying CLO portfolio, which have been primarily prompted by economic shocks stemming from the coronavirus pandemic. Since the outbreak widened in March, the decline in corporate credit has resulted in a significant number of downgrades, other negative rating actions, or defaults on the assets collateralizing the CLO. Consequently, the default risk of the CLO portfolio has increased substantially, the credit enhancement available to the CLO notes has eroded, exposure to Caa-rated assets has increased significantly, and expected losses (ELs) on certain notes have increased materially.
Based on the July 2020 trustee report[2], the weighted average rating factor (WARF) was reported at 3246, or 13.1% worse compared to 2869 reported in the March 2020 trustee report[1]. Moody's calculation showed the WARF was failing the test level of 2943 reported in the July 2020 trustee report[2] by 303 points. Moody's noted that approximately 30.0% of the CLO's par was from obligors assigned a negative outlook and 1.0% from obligors whose ratings are on review for possible downgrade. Additionally, 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 14.5% as of July 2020. Furthermore, Moody's calculated the total collateral par balance, including recoveries from defaulted securities, at $481.7 million, or 3.7% or $18.3 million less than the deal's ramp-up target par balance. Based on the July 2020 trustee report, the over-collateralization (OC) ratios for the Class D-RR Notes and the Interest Diversion Test are both at 103.64%, failing their respective trigger levels of 104.70% and 105.70%. The failure of the Class D OC test will divert the residual interest proceeds to be used to pay down and deleverage the senior notes.
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."
The key model inputs Moody's used 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 analyzed the collateral pool as having a performing par and principal proceeds balance of $477.0 million, defaulted par of $13.7 million, a weighted average default probability of 26.10% (implying a WARF of 3190), a weighted average recovery rate upon default of 47.20%, a diversity score of 65 and a weighted average spread of 3.59%. Moody's also analyzed the CLO by incorporating an approximately $5.0 million par haircut in calculating the OC and interest diversion test ratios.
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 March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111156. 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 12-Mar-2020
[2] 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.
Kevin Anthony Asst Vice President - 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 Leon Mogunov Associate Managing Director 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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