Moody’s Investors Service to Revise CLO Methodology

Moody’s Investors Service said it’s revising the way it grades collateralized loan obligations.

The ratings company is reviewing the level of stress it applies to its default-probability assumptions when grading CLOs, according to a statement today. Moody’s expects the review to be completed in the first quarter.

In February 2009, Moody’s introduced an adjustment to its base default-probability assumptions used in rating CLOs to account for “anticipated prolonged period of economic stress, which in turn could produce default levels higher than historical long-term average,” according to the statement.

“When we first introduced the default-probability stress factor in 2009, we also said we had to review the stress factor on a periodic basis,” Jian Hu, managing director, head of global derivatives surveillance at Moody’s, said in a telephone interview. “The corporate outlook has improved and there is reduced economic uncertainty. We think it is time to revise and reassess this stress factor.”

CLOs are a type of collateralized debt obligation that pool high-yield, high-risk loans and slice them into securities of varying risk and return.

“Given the improved corporate credit outlook and reduced macroeconomic uncertainty, Moody’s now expects to reduce the stress factor, currently set at 30 percent, upon the conclusion of its review,” the New York-based company said in the report.

To contact the reporter on this story: Kristen Haunss in New York at khaunss@bloomberg.net

To contact the editor responsible for this story: Faris Khan at fkhan33@bloomberg.net

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