Moody's Investors Service plans to introduce both loss-given-default ratings and probability-of-default ratings on non-financial speculative-grade corporate issuers. It has published a rating methodology and is looking for feedback from market participants by Feb. 28. The new ratings disaggregate two assessments already used in long-term ratings. Currently, long-term ratings are opinions about expected credit loss, which incorporate the likelihood of default and the expected loss in the event of default. Separating the two should result in less conservative ratings on bank loans.
"One of the reasons we embarked on this path, is that investors have told us they want to better understand what drives credit ratings, what is the likelihood of default," explained Mike Rowan, group managing director and co-head of corporate finance in the Americas. "We had observed through our own research that the ratings on senior secured bank debt relative to senior unsecured bonds seemed a bit conservative and we were looking into that issue." Rowan could not comment on any names that might be affected.
The loss-given-default ratings (LGDs) will be assigned to the corporate family and its individual rated debt issues, such as loans, bonds and preferred stock. Probability-of-default (PDRs) ratings will be assigned to issuers, not specific debt instruments. The standard Moody's alpha-numeric scale will be used and the rating will express Moody's opinion regarding the likelihood any entity within a corporate family will default on any part of its debt obligations.
These changes would be applied to the roughly 1,300 corporate names in North America that are speculative grade, according to Moody's. The changes are expected to be introduced in the next six-to-18 months in North America. The changes would likely be rolled out in waves during that period, based on industry.