“I think what made Moody’s stand out from the crowd was our measured, coherent, globally-aligned approach to assessing credit risk in turbulent times,” says Neal Shah, managing director of Moody’s EMEA structured finance group. “We looked at our portfolios around the world, whether structured finance or fundamental asset classes, to make sure we had a fully consistent standard in how we assessed transactions.
“We weren’t just focused on the structured finance world in isolation because it’s really not possible to comment on CLO performance unless you understand leveraged loan performance. It’s not possible to talk about RMBS without knowing about housing markets or the impact on the banking sector. We put a lot of thought into consistency and alignment last year that I think served us well, and when you look at the magnitude and level of the rating actions we took, our approach was based on precision.”
One of the reasons the firm does so well in structured finance is the focus it puts on interaction with market participants, and it logged more than 1,000 meetings with investors, issuers and intermediaries last year. That doesn’t just give market participants access to Moody’s analysts, allowing them to get first-hand the firm’s views of issues, trends and developments. It’s also a virtuous circle that gives analysts a first-hand view of what stakeholders are thinking which can feed into contextual research.
“Listening to market participants is key to enriching our research output,” says Shah. “We’re writing about the topics that are top-of-mind in the market.”
Speaking to a Moody’s analyst means calling on the wealth of experience of its franchise leaders and the long-term stability in its ranks. “Our experience in structured finance is our number one strength,” says Shah. “We see that most clearly when there is something new in the market, whether that’s a new issuer, a new jurisdiction or a new structure, that more often than not people turn to us.”
The structured finance team at Moody’s published almost 300 reports in 2020, a big increase on its pre-pandemic output, but Shah estimates that perhaps only 25% to 30% was related solely to the emergency.
“We made sure that we continued to cover those topics outside of the pandemic that are important to the market, whether that was harmonisation laws, performance trends or other major topics like the Libor transition,” he says.
Moody’s also worked hard to present its views better to market participants, introducing more infographics, for instance, while enhancing its written approach. “People can only read so many pieces per day,” says Daniel Kolter, a managing director for consumer assets.
“The reports are shorter, they’re crisper and we’ve made it easier for the readership to grasp the key messages. We also enhanced our digital offering, providing opportunities for readers to access our information in a form that is most convenient to them.
“We benefited from the overarching infrastructure and global footprint of Moody’s for our outreach interactions, upgraded the technology several times in 2020 alone and moved quickly from in-person physical events to a digital offering.”
The heat maps that Moody’s started to publish were one result of the approach, highlighting sectors or areas where it saw potential ramifications of the pandemic. The firm also introduced a performance monitor for Covid-19 which responded to the inconsistency in the manner in which servicers reported loans under nationally-imposed payment moratoria.
“Traditionally, we’re focused on measures like delinquencies and defaults but in the pandemic, it became important to assess the impact of payment moratoria and how this could have an effect on cashflows as well as traditional credit risk,” says Thorsten Klotz, a managing director for corporate assets.
The Covid Performance Monitor publications provided the market with a broader range of indicators showing how the pandemic was eroding transaction cashflows such as monthly interest receipts, scheduled and unscheduled principal cashflows, excess spread, delinquencies and reserve fund levels.
“Focusing on that early was something the market wanted at that time, and we were able to provide more clarity on actual pool performance as it evolved through the crisis” says Klotz.