Anticipating full execution in the market this month, Moody's Investors Service recently published the final methodology for loss-given-default assessments (LGDs) and probability-of-default ratings (PDR), as well as implementing the methodology for new, first time issuers in the U.S. and Canada on Sept. 6.
PDRs will be assigned to issuers and not to specific debt instruments, using the standard Moody's alpha-numeric scale. LGDs, ranging from LGD1 (loss anticipated to be 0% - 9%) to LGD6 (loss anticipated to be 90% - 100%), will be assigned to individual rated debt issues including loans, bonds and preferred stock.
According to Moody's all new deals will be rated in accordance with the published methodology, "regardless of whether the entire sector has been transitioned to the LGD methodology."
Moody's also addressed the likely potential that the new methodology will bump up the bank loan ratings for a number of issuers. "The application of an expansive and rigorous estimation model for loss given default may lead to higher ratings on a larger number of corporate loans," noted Michael Rowan, Moody's group managing director, in a recent release. However, the rating agency explained that credit losses on bank loans have tended to be lower than those for similarly rated bonds.
CLO application
Stepping out of the corporate ratings level, Moody's affirmed that it will be using these assessments and ratings in its U.S. cash flow collateralized loan obligation (CLO) rating methodology.
Under the new methodology, Moody's will assign the same default probability to all debt instruments from one corporate family. Currently, Moody's assigns a different default probability to senior secured loans than to other debt instruments from the same obligor. Additionally, tracking recovery rates will involve monitoring only one measure, Moody's point estimate of the LGD. The current approach requires CLOs to monitor two ratings as well as their relationship, to track recovery rates.
The rating agency published a request for comment last Aug. 31, set to terminate on October 20, 2006. Moody's expects to publish its final approach in December 2006 and to begin applying the approach in January 2007.
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