Moody’s Investors Service published a report last week asking for comments on proposed changes to its U.S. cash-flow collateralized loan obligation rating methodology. The changes incorporate Moody’s new loss-given-default assessments and probability-of-default ratings. The ratings agency will be accepting comments until Oct. 20. It expects to publish its final methodology in December and begin to apply it in January.
Previously the ratings agency determined default probability and recovery assumptions for CLOs from its expected loss rating. After the implementation of the new rating methodology, Moody’s will now use LGDs and PDRs to rate CLOs.
The ratings agency does not expect the proposed changes will result in materially different ratings to either existing CLOs or new portfolios. However, the ratings agency said that in testing the ratings on a typical CLO structure, expected losses of some lower-rated tranches may increase and the expected losses of higher-rated tranches may decrease.