Moody’s just put a fifth of a category of debt securities on review for downgrading

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Moody’s has placed 859 securities of 358 US secured loan obligations under review for downgrading.

Photograph by Mario Tama / Getty Images

Moody’s plans to downgrade nearly 20% of the securities it covers that are backed by pools of corporate loans, called secured loan bonds or CLOs.

The coronavirus pandemic has brought many economic activities to a halt. This caused the average credit quality of loans from these pools to deteriorate by 14% over the past month, according to the rating company’s models.

Because of this, the expected losses for many securities backed by these loans have “increased significantly,” Moody’s said.

Analysts have put 859 stocks of 358 US CLOs under review for downgrading, they said in a note Friday announcing the potential downgrades. CLOs generally accumulate a pool of loans with certain characteristics.

In particular, the list of securities highlighted for potential degradation includes investment grade securities or debt securities located at the upper end of the CLO seniority stack. This is important because it could affect the categories of investors who will be paid.

A CLO typically issues multiple tranches of debt (and one tranche of equity) to investors with different seniority, and this determines the order of payments: AAA debt is paid first, AA is paid second, A is paid in third, BBB is paid in fourth, etc. Approximately 1.5% of securities under watch are rated A and 41% are rated BBB.

Normally, Moody’s decides to downgrade a security within three months of placing it on watch. “However, due to the high degree of uncertainty in the current credit environment, the resolution of this watchlist action may extend beyond our usual timeline,” the company said in its announcement.

Write to Alexandra Scaggs at [email protected]


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