ROCKALL CLO B.V. - Irish Stock Exchange

inter-company guarantees such a process leaves the High Yield Securities investors deeply
subordinated to secured and unsecured creditors of the operating companies and means that investors
therein will not necessarily have access to the same security package as the senior lenders (even on a
second priority charge basis) or be able to participate directly in insolvency proceedings or
pre-insolvency discussions relating to the operating companies within the group. While this structure is
being used less frequently in Europe, it is nevertheless more common in Europe than the U.S.
In the case of High Yield Securities issued by issuers with their principal place of business in Europe,
structural subordination leads European High Yield Securities defaults to realise lower average
recoveries than their U.S. counterparts. Another factor affecting recovery rates for European High Yield
Securities is the bankruptcy regimes applicable in different European jurisdictions and the enforceability
of claims against the High Yield Securities issuer (see the section of these Risk Factors headed "2.16
Insolvency Considerations relating to Issuer Investments" below). It must be noted, however, that the
overall probability of default (based on credit rating) remains the same for both U.S. and European
credits. It is the severity of the effect of any default that differs between the two markets as a result of
the aforementioned factors.
In addition to the characteristics described above, High Yield Securities frequently have call or
redemption features that permit the issuer thereof to redeem such obligations prior to their final maturity
date. If such a call or redemption were exercised by an issuer during a period of declining interest rates,
the Collateral Manager, acting on behalf of the Issuer, may only be able to replace such called obligation
with a lower yielding obligation or be obliged to pay a premium for a similarly yielding obligation, thus
decreasing the net investment income from the Portfolio.
2.7 Risks relating to Loans
Senior loans and mezzanine loans of the type in which the Issuer may invest are often incurred by
obligors in connection with highly leveraged transactions, often (although not exclusively) to finance
internal growth, acquisitions, mergers and/or equity purchases. As a result of the additional debt
incurred by the obligor in the course of such a transaction, its creditworthiness is frequently judged by
the rating agencies to be below investment-grade. Higher levels of debt in an obligor may make it more
susceptible to adverse changes in the financial condition of its business and/or in general economic
conditions (including a sustained period of rising interest rates or an economic downturn) and may affect
the ability of the obligor to make payments of principal and interest on its debt.
Senior loans are typically senior in the capital structure, with mezzanine loans being subordinated to any
senior debt of the obligor. Senior loans are often secured by specific collateral, including but not limited
to trademarks, patents, accounts receivable, inventory, equipment, buildings, real estate, franchises and
common and preferred equity of the obligor and its subsidiaries. Mezzanine loans often have the benefit
of a second charge over such assets. Senior loans usually have shorter terms than more junior
obligations and may require mandatory prepayments from excess cash flow, asset dispositions and
offerings of debt and/or equity securities.
A below investment-grade loan or debt obligation or an interest in a below investment-grade loan is
generally considered speculative in nature and may become a defaulted obligation for a variety of
reasons. Upon any Issuer Investment becoming a defaulted obligation, such defaulted obligation may
become subject to either substantial workout negotiations or restructuring, which may entail, among
other things, a substantial reduction in the interest rate, a substantial write-down of principal or a
substantial change in the terms, conditions and covenants with respect to such defaulted obligation. In
addition, such negotiations or restructuring may be extensive and protracted, and may result in
uncertainty as to the ultimate recovery on such defaulted obligation. The liquidity of defaulted
obligations may be limited and, to the extent that defaulted obligations are sold, the proceeds from such
sale may not be equal to the amount of unpaid principal and interest thereon.
Senior loans and mezzanine loans also generally provide for restrictive covenants designed to limit the
activities of the obligors thereunder in an effort to protect the rights of lenders to receive timely payments
of interest on, and repayment of, principal of the loans. Such covenants may include restrictions on
dividend payments, specific mandatory minimum financial ratios, limits on total debt and other financial
tests. A breach of a covenant (after giving effect to any cure period) under a senior loan or mezzanine
loan which is not waived by the lending syndicate normally is an event of acceleration which allows the
syndicate to demand immediate repayment in full of the outstanding loan.
The fact that mezzanine loans are generally subordinated to any senior loan and potentially other
indebtedness of the relevant obligor thereunder, usually have a longer maturity than such other
indebtedness and will generally only have a second ranking security interest over any security granted
in respect thereof, increases the risk of non-payment thereunder of such mezzanine loans in an
enforcement situation.
Senior loans and mezzanine loans are unique and customised in nature and, along with the provision of
confidential information and the private syndication of the instruments, this means that senior loans and
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