Moody’s Publishes Report on CLO Supplemental Risk Measures

Moody’s Investors Service published a report today called V Scores and Parameter Sensitivities in the Global Cash Flow CLO Sector.

The report shows how the rating agency’s supplemental risk measures for structured finance transactions will apply to the global cash flow CLO sector.

Moody’s applies the measures to typical CLO transactions backed by pools of broadly syndicated and speculative grade senior secured corporate loans.

The overall V Score and the scores of the components and subcomponents are represented on a five-point scale, from low to high assumption variability.

These scores provide a relative assessment of the quality of available credit information and the potential variability around the various inputs to a rating determination.

Moody’s concluded that V Scores for a typical CLO transaction are expected to reflect Medium/High assumption variability.

Parameter Sensitivity analysis is the second supplemental measure in this sector, and provides a quantitative/model-indicated calculation of the number of rating notches that a Moody’s-rated structured finance security may vary if certain input parameters used in the initial rating process differed.

This means that if an average default probability of 25% and recovery rate of 45% were used in determining the initial rating of a sample cash flow CLO transaction, these were then changed to 33% and 40%, respectively, then the initial model-indicated rating for the senior certificates might change from ‘Aaa’ to ‘Aa3’.

The Moody’s Diversity Score may have an impact on ratings of cash flow CLOs, the report said, which included a separate analysis of the potential impact of a change in the value initially assumed for this third key parameter.

Moody’s began the new assessments in July of last year, and refined them in December 2008, as described in the report Updated Report on V Scores and Parameter Sensitivities for Structured Finance Securities.

Moody’s said it will report transaction-specific V Scores and Parameter Sensitivities in presale reports, new issue reports and press releases.