Moody's may cut ratings on US$22b of loan obligations

Manhattan

MOODY'S Investors Service said it may cut the ratings on US$22 billion of US collateralised loan obligations (CLO) - a fifth of all such bonds it grades - after the Covid-19 pandemic eroded the financial standing of American companies backed by the securities.

The ratings firm took the action on 859 bonds from 358 CLOs that package leveraged loans into securities of varying degrees of risk and return, according to a statement late on Friday. The step - which affects about 19 per cent of Moody's-rated CLOs that purchase broadly syndicated loans - comes as the underlying debt gets downgraded at a record pace.

Expected losses on the CLO securities Moody's rates have "increased materially", it said. The pandemic has erased earnings at businesses, leading credit quality to deteriorate. More than 40 per cent of the bonds on review have an investment-grade rating, with 13 rated A, and 355 rated at the Baa level. The rest have sub-investment ratings through to CCC.

CLOs are the biggest buyers in the US$1.2 trillion leveraged loan market, which in recent years fuelled a boom in debt-fuelled buyouts and other transactions. But the loans have been particularly hard-hit in the market rout triggered by the pandemic, with a benchmark index plunging last month to the lowest level since the global financial crisis. The index has recovered some of its losses in recent weeks.

The extent of losses that CLO bonds incur depends on the deals' exposure to downgrades and other negative ratings actions on the underlying loans, as well as the bonds' priority in the capital structure. How much cushion the bonds have either from asset coverage or cash flow diverted from riskier debt that sits below them is also a factor. BLOOMBERG