After announcing it had downgraded approximately 500 tranches of 93 U.S and European CLOs, Moody’s Investors Service said Monday that the majority of top-rated CLO tranches are in danger of losing their triple-A rating.

As scary as that sounds, Moody’s said those triple-A tranches will mostly fall to the double-A category and that many triple-A tranches will retain their triple-A status. The roughly 500 tranches that were downgraded were worth about $33 billion. Most of the debt was downgraded three or four notches, however 130 top-rated tranches weren’t hit as hard.

“This performance deterioration coincided with the global corporate credit deterioration, which has been one of the worst in several decades,” the Moody's analysts said.

The CLO downgrades in the second quarter were nothing compared to the number of downgrades in the first. The ratings agency downgraded approximately 1800 tranches in the first quarter. That brings the year-to-date number to 2,307 tranches totaling $82 billion. The number downgrades accelerated in February when Moody’s changed the way it rates CLO debt, increasing default probability assumptions for the loans included in CLO portfolios by 30% (LFN, Feb. 19, 2009).

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