Several top-rated CLOs managed by Invesco and Highland Capital Management saw their Aaa tranches downgraded by Moody’s Investors Service Tuesday.

Moody's downgraded the tranches between one and four notches, with parts of one CLO, managed by Highland, downgraded to Baa2 from Aaa. Moody's reduced the ratings because of its revised ratings methodology.

The rating agency announced its revised methodology in February and has since slashed the ratings on a number of CLOs.

Rating downgrades like these, which are based on the credit quality of the leveraged loans the CLO holds, have forced CLO arrangers, typically banks, to raise capital to cover any losses. Moreover, most banks hold on to the triple-A–rated paper of the CLOs they arrange, so these recent downgrades could impact banks’ fundraising efforts and force them to sell pieces of the CLOs.

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