Large-scale downgrades in CLO ratings, resulting from changes in rating methodology by Standard & Poor’s, will not likely result in a wide-spread sell-off of CLOs, according to a report published Wednesday by Wells Fargo Securities.
S&P released its new rating methods for CLOs on Sept. 17, estimating that the changes would cause downgrades of one notch for AAA-rated notes, and two or three notches for junior 'AA' through 'BB' tranches.
“In our opinion, these changes are largely reasonable and provide clarity on what investors can expect from a specific rating,” Wells Fargo analysts said in their report. “Our belief is that this change will not prompt ratings-based selling by senior note holders.”
Wells Fargo said that CLO note holders were not likely to sell because many of them own the notes at or near par and would be reluctant to sell at a discount. Moreover, they have already faced similar downgrades by Moody’s Investors Service.