Moody’s Investors Service (“Moody’s”) has downgraded the rating on the following notes issued by Semperian Senior Funding Plc:
….GBP 41.4M Class D Notes, Downgraded to Baa3 (sf); previously on Jun 21, 2021 Affirmed A3 (sf)
Moody’s has also affirmed the ratings on the following notes:
….GBP 288M (Current Outstanding amount GBP 40.9M) Class A Notes, Affirmed Aaa (sf); previously on Jun 21, 2021 Affirmed Aaa (sf)
….GBP 15.5M Class C Notes, Affirmed Aaa (sf); previously on Jun 21, 2021 Upgraded to Aaa (sf)
Semperian Senior Funding Plc, issued in December 2007, is a Collateralised Loan Obligation (“CLO”) backed by a portfolio of United Kingdom project finance and infrastructure assets. The portfolio is managed by Semperian Business Support Limited. This transaction exited the revolving period in July 2012. Moody’s notes there are only 9 loans in the pool with highly concentrated exposures in the healthcare, education and defence industries.
The rating downgrade on the Class D notes is primarily a result of the deterioration in the credit quality of the underlying collateral pool since the payment date in April 2022. The deterioration in the credit quality is observed through a higher average credit rating of the portfolio (as measured by the weighted average rating factor “WARF”). In particular, the WARF has deteriorated to 311 compared to 191 in April 2022.
The affirmations on the ratings on the Class A and C notes are primarily a result of the expected losses on the notes remaining consistent with their current rating levels, after taking into account the latest portfolio, its relevant structural features and its actual over-collateralisation ratios.
Methodology Underlying the Rating Action:
The principal methodology used in these ratings was “Project Finance and Infrastructure Asset CLOs Methodology” published in November 2021 and available at https://ratings.moodys.com/api/rmc-documents/355059. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
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 2022. 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:
The principal sources of uncertainty that may impact notes performance include limitations of historical data for some of the project finance asset types, long maturities of the underlying loans and counterparty influence on loan performance. Additionally, 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 and (2) divergence in the legal interpretation of CDO documentation by different transactional parties because of embedded ambiguities.
Additional uncertainty about performance is due to the following:
• 100% of the collateral pool consists of debt obligations whose credit quality Moody’s has assessed by using credit estimates. As part of its base case, Moody’s has stressed large concentrations of single obligors bearing a credit estimate as described in “Global Approach to the Use of Credit Estimates” published in March 2023 and available at https://ratings.moodys.com/api/rmc-documents/395108.
• Lack of portfolio granularity: The performance of the portfolio depends to a large extent on the credit conditions of a few large obligors with low non-investment-grade ratings, especially when they default. Because of the deal’s lack of granularity, Moody’s substituted its typical Binomial Expansion Technique analysis with a simulated default distribution using Moody’s CDOROM™ software and an individual scenario analysis. Moody’s notes there are only 9 loans in the pool with some exposures of more than 10% to a single loan. Moody’s tested a potential jump-to-default risk by assuming a rating of Caa2 for the two largest credit estimates of the portfolio, separately. The model generated an output that was the consistent with the base case result for the most senior tranche.
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.