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22 Mar 2011
New York, March 22, 2011 -- Moody's Investors Service today is seeking comment from market participants
regarding proposed changes to its modeling framework for cash-flow
Collateralized Loan Obligations ("CLOs"). The proposals
reflect improvement in the economic and credit environment and a thorough
review of the findings from approximately 90 years of historical corporate
default data as well as more than 20 years of recovery rate data.
These proposed changes have the aggregate effect of changing the credit
enhancement levels for a given rating category above the levels prior
to the financial crisis but slightly below the levels during the crisis.
If Moody's implements these changes, it anticipates upgrades
on outstanding CLOs to average about one notch for senior and mezzanine
tranches and between two and three notches for junior tranches.
Moody's principally proposes removing a temporary 30% macroeconomic
stress (macro stress) to its default probability assumptions. In
February 2009, Moody's introduced the stress in response to
both the extraordinary potential depth of the global recession and likelihood
of a sluggish recovery. Moody's believes it is now appropriate
to remove this stress because credit conditions have greatly improved.
However, after reviewing the historical corporate default and recovery
rate data, Moody's has decided to recalibrate a few key modeling
parameters within the Binomial Expansion Technique ("BET")
model and also change various aspects of the methodology to reflect these
Specifically, Moody's proposes to change its BET Model,
which it uses in the ratings of cash-flow CLOs, as follows:
Remove the 30% default probability macro stress to reflect
our improved outlook for global speculative-grade corporate entities
Recalibrate key modeling parameters by increasing the BET liability
stress factors and increasing recovery rate assumptions to 1) better reflect
empirical evidence obtained from corporate default and recovery data and
2) provide for greater rating stability through future credit cycles
Modify several modeling assumptions associated with defaults of
reinvestments, asset amortizations, interest collection from
defaulted assets, and the analysis of combination notes
Reduce certain stresses for credit estimates aimed at addressing
time lags in credit estimate updates during the recent crisis
According to Yvonne Fu, a Managing Director at Moody's responsible
for rating new CLOs in the U.S., "Perhaps the
most significant changes, at least in terms of the likely impact
on Moody's CLO ratings, concern the 30% default probability
macro stress, BET model stresses, and recovery rate assumptions.
These proposed changes are the result of an extensive study and back testing
of the CLO rating model using a large amount of historical corporate data
available to us."
Moody's indicated that the proposed changes would apply globally
to CLOs and CBOs that it models using the BET modeling framework.
This request for comment does not include transactions rated using other
modeling frameworks (including CDOROM). However, Moody´s
is currently reviewing such other CDO modeling frameworks to bring consistency
with the changes proposed today. It expects to conclude the review
in the coming months
Henry Charpentier, a Managing Director at Moody's responsible
for rating new CLOs in Europe, said, "in light of the
historical data observations and corporate fundamental approaches to assessing
recovery rates for European corporate assets, Moody's has
proposed not to tier recovery rates by legal jurisdictions. Furthermore,
Moody's is considering to adopt a fixed rate recovery rate modeling
approach for European deals, much like the approach currently used
in the US."
Moody's seeks comments as part of a process that will include a
review of its ratings. Moody's asks market participants to
respond no later than April 8, 2011 to the proposals described in
"Moody's Proposes to Change Its Global CLO Modeling Assumptions,"
which is available on Moodys.com. Upon implementation of
the proposed changes, Moody's will place potentially affected
ratings of transactions on review for upgrade.
Yvonne F. Fu
MD-US and Amer Structured Cred
Structured Finance Group
Moody's Investors Service
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service
Moody's issues request for comment on changes to its CLO rating methodology
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New York, NY 10007
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CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
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