Fitch Ratings published an exposure draft last week on its new methodology to incorporate recovery ratings into the ratings of collateralized loan obligations. The firm said the hope is to better determine the credit loss profile of the CLO collateral portfolio.
Fitch expects modest positive rating changes within CLOs as a result of the new methodology.
The ratings agency said that incorporating recovery ratings will allow it to differentiate better between the various senior secured leveraged loans, such as second lien, mezzanine and middle-market loans. It will be applied to new CLOs and used to monitor existing CLOs
The ratings agency is accepting comments about the exposure draft for 30 days. Following a review, Fitch will publish the final criteria changes. John Schiavetta, group managing director, said the ratings will go into effect shortly after that 30-day period; he anticipates it will be in roughly six weeks.
Fitch introduced recovery ratings for all corporate and financial issuers rated B and below last year. Its scale RR1 is outstanding, RR6 is poor was established using a bespoke analysis comparing distressed enterprise values against a given security's position in the capital structure.
Because the agency formally released the exposure draft last Thursday, Schiavetta has not engaged in formal discussions with individuals in the market, but said there has been a positive response to recovery ratings on the corporate side. "It has been well received, so the idea of incorporating them into CLO/CDO analysis has been generally supported in the market," he said.