Moody’s Investors Service plans changes to its methodology for rating securities backed by the debt of start up companies that could result in downgrades of up to two notches on outstanding transactions.

Most of the obligors of loans in these transactions are developmental stage growth companies in which venture capital firms invest. So cash flows are dependent on the ability of these companies to raise additional rounds of venture capital, which in turn is based on the their ability to reach product development milestones, rather than on product revenue. And a pool has loans from a diverse range of obligors, there is little correlation between the ability of one obligor to meet a milestone and the success of failure of another obligor.  

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