Morningstar Credit Ratings continued its push to become a one-stop ratings agency this fall, adding collateralized loan obligations to its menu of structured finance ratings.
Morningstar posted its first-ever assessments of broadly syndicated public CLOs in September and November; previously it had focused on private-label residential and commercial mortgage-backed securities.
The transactions followed on the heels of Morningstar’s unrelated SEC-approved expansion into corporate issuer and financial institutions ratings.
“We’ve geared up to be a full service ratings agency,” said Brian Grow the managing director for ABS and residential mortgage backed securities for the Morningstar. “We’ve now been running with RMBS for a few years, CMBS for 10 years, and have had ABS for a couple of years. We’ve been rating a lot of private deals and now we’ve fired up [broadly syndicated] CLOs.”
Morningstar joins a field of other national recognized statistical ratings organizations (or NRSROs) now covering the CLO market, including Moody’s Inc., McGraw Hill’s Standard & Poor’s, DBRS and Fitch Ratings Inc.
Standard Issuer-Pay Model
Morningstar operates its ratings business under the standard “issuer-pay” model like the other agencies, and also markets a subscription-based monitoring tool for structured-finance investors.
Morningstar has previously issued private ratings for four middle-market CLOs as well as a pair of warehouse credit lines. The assembled team of CLO analysts is on a pace to prepare one public rating a month, and that “may go up as we get exposure,” Grow said.
“It’s a good opportunity for us,” he said. “We’ve met with several managers, so now we are deep into this new phase.”
Although CLO primary issuance has waned this year, Grow says he is optimistic that the ratings analysis and market research opportunities will heat up for the agency heading into 2017.
Morningstar published its first presale on a public CLO in September with THL Credit’s $655 million Wind River 2016-2 CLO. That was followed up in November with a report rating the $449 million Sale Fields CLO 2016-2, the latest CLO marketed by Guggenheim Partners Investment Management LLC.
Focus on Management Fees
Morningstar only rated the ‘AAA’ tranches in both deals, but its reports included the standard CLO portfolio measurements liked weighted life tests and the average aggregate rating of underlying loans in the deal.
The agency also made some information, such as management fees, more prominent in its reports do other credit rating agencies. It gives front-page treatment to both the senior and junior fees of the managers, as well as incentive pay parameters established by the issuer.
Morningstar is concentrating only on the U.S. market, which had $98.5 billion of new issuance in 2015. The pace has slowed by 37% in 2016 (with just $54.5 billion), and in the first 10 months of the year, 70 managers completed CLO deals, according to Wells Fargo.
There has also been a slew of refinancing and reset deals in recent months as managers and firms scramble to arrange new terms on their deals prior to the enforcement of new risk-retention rules. Managers will be required to hold on to 5% of the economic risk of deals completed after Dec. 24.
The launch of the CLO ratings business followed Morningstar’s expansion into corporate issuer and financial institution ratings in August.
The company’s ratings business includes several subsets of RMBS/CMBS structures including single-family rentals, conduit/fusion, agency and single-borrower deals. It also recently rated a clean energy green-bond securitization, GoodGreen 2016-1, a pooling of Property Assessed Clean Energy (PACE) loans issued by Ygrene Energy Fund.
Grow said Morningstar will be creating and publishing routine research reports on the CLO industry, spotlighting both the performance of portfolios and underlying loans.
Morningstar does not yet cover asset classes such as municipal, government or sovereign ratings, but a spokesperson stated the firm may pursue registration to be an SEC-designated agency to cover insurance firms, which would have Morningstar competing with the likes of A.M. Best.