Credit ratings have historically played a relatively small role in the European leveraged loan market, which through the 1990s was comprised of privately held companies borrowing almost exclusively from banks.

With few institutional investors participating in lending syndicates, there wasn't much need for issuers to pay to have their loans rated, particularly since few of these companies have stocks or bonds that are publicly listed or rated.

It was only at the start of the last decade, when collateralized loan obligations emerged as big buyers, that Standard & Poor's, Moody's Investors Service and Fitch Ratings started to provide opinions on European loans, and they did it in order to analyze the credit risk of securities issued by the CLOs. This product, which S&P and Moody's call a credit estimate and Fitch calls a credit opinion, is paid for by the CLO manager, rather than the issuer, and is only distributed to the CLO manager.

Now that CLOs are diminishing as the biggest investors in European loans, S&P, Moody's and Fitch need to find a new market for these shadow ratings from the ranks of investors such as institutions and mutual funds that are stepping in to fill the funding gap. In the process, the ratings agencies are hoping to push customers toward a higher-end product, one that is paid for by the issuer or its private equity sponsor, rather than an intermediary such as a CLO or fund, and can be distributed more widely than a credit estimate or opinion.

Last week Moody's launched a new service in the EMEA loan market that it said provides identical analysis to its public loan ratings, but will be distributed only to existing and prospective syndicate members, and solely online. The company said it developed the product, called the Unpublished Monitored Loan Rating (UMLR), in response to market feedback about a growing need for access to detailed credit analysis.

Moody's new service is only available to borrowers that don't have publicly traded debt outstanding, however.

At the same time, Moody's introduced a threshold for credit estimates; effective March 1, it will now only provide this more limited service for loans of companies that have total syndicated debt facilities of less than €250 million. Only UMLRs and public ratings will be available to companies that have more than €250 million in syndicated debt.

Moody's will continue to provide credit estimates to issuers with more than €250 million in syndicated debt that already have this type of rating, and it will periodically update its estimates, irrespective of the threshold, unless the issuer is involved in a new buyout, refinancing, or recapitalization.

"Moody's expects there will be a greater need for definitive credit analysis in the European leveraged loan market as it matures," Andrew Harling, the rating agency's vice president for business development, said in a telephone interview.

He said Moody's expects that a portion of the debt that needs to be refinanced by the end of 2015 in the European leveraged loan market will use UMLR and its public ratings services. Moody's move mirrors S&P's decision, in December 2008, to offer what it calls private ratings for purely private European loan deals of between €500 million and €1 billion. S&P has since revised its methodology to offer private ratings only to deals between €250 million and €750 million; the new, lower threshold takes effect on Jan. 1. Credit estimates will be available on deals below this threshold, but only public ratings are available to deals greater than €750 million.

Paul Drake, head of product management for S&P in Europe said private ratings are more comprehensive in that they analyze both the risk of default and the likelihood of recovery, while credit estimates only look at default risk. "It's not simply a case of who pays. It's fair to say that one of the consequences of the financial crisis is that investors of all kinds are more focused not just on default risk but on what kind of recovery they can expect," Drake said.

He said S&P originally launched its private ratings and introduced limits on credit estimates because, at the time, LBOs were getting larger and larger and the ratings agency didn't think it was appropriate to have a credit estimate on an LBO. The more recent action to lower the thresholds reflects the fact that the average deals size is coming down, Drake said. He said it also reflects a growing acceptance that private ratings should play a role in the market.

S&P currently has 1600 credit estimates in Europe, 640 of which are corporates, most of them leveraged loans. It assigned 25 private European loan ratings in the first three quarters of this year; Drake didn't provide comparable figures but said this was an increase over previous years.

Fitch also provides both credit opinions and private ratings on European loans, but unlike S&P and Moody's it doesn't set thresholds for the two products. "Our view is that it should not be at the discretion of the ratings agency to tell the market which product the market should get, particularly given the lack of a regulatory disclosure regime" in Europe, said Edward Eyerman, the rating agency's head of EMEA leveraged finance. "We don't want a public rating on a private company to be the only source to the market."

Nevertheless, Fitch also sees a broader market for its private and public ratings in Europe. The ratings agency has 300 credit opinions in its portfolio that it provides to about 36 different funds and banks. "Those borrowers are likely to look at other options beyond their own bank or CLO relationships, and a private or public rating might facilitate diversification of funding sources," Eyerman said. Also, "when a name goes into insolvency, it's in their interest as a company to pay for a ratings product rather than the equity or CLO paying for it."

Fitch doesn't disclose the number of private loans it rates in Europe.

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