Moody's Investors Service expects to publish its U.S. cash-flow collateralized loan obligation rating methodology in January, three months after putting it out for discussion. Comments were due Dec. 1 and last week analysts began digesting the few comments the ratings agency received. Bill May, managing director, doubted the methodology issued next month will be materially different from the initial proposal.
In late August, Moody's published the report that explained how it planned to incorporate loss-given-default assessments and probability-of-default ratings. Previously for CLOs, the ratings agency determined default probability and recovery assumptions from expected loss ratings. After the implementation, Moody's will use LGDs and PDs to rate CLOs. In initial testing over the summer, the ratings agency found that ratings on a typical CLO structure could see expected losses for some lower-rated tranches increase and the expected losses of higher-rated tranches decrease. However, it does not anticipate materially different ratings for existing portfolios or new ones (CIN, 9/4). Moody's pushed back the comment period because a number of market participants asked for more time to respond (10/27).
The one anecdotal comment the ratings agency received was the need for rules for determining a recovery rating for assets that are not part of LGD assessments. Such corporate credits can include REIT credits and project finance loans. May expects Moody's will develop an approach to assess these types of situations.
Moody's first formally introduced LGDs and PDs last January (1/13). It completed the rollout in October after applying the methodology to more than 1,000 U.S. and Canadian-based companies, for about 3,000 rated debt instruments (10/27).