Moody's Corporation · NYSE:MCO
Moody's — Technical Presentation (October 2020)
24 slides from Moody's's technical presentation, Oct 1, 2020
Slide 1: CLO Methodology RFC and Current CLO Landscape
CLO Methodology RFC and Current CLO Landscape US and European CLOs October 1, 2020
Slide 2: Agenda
Agenda » CLO methodology RFC ❑ Summary and background » Current CLO landscape ❑ Corporate default rates have risen ❑ Credit metrics continue gradual recovery ❑ Rating reviews largely completed Global CLO Webinar , Oct 2020 2
Slide 3: CLO methodology RFC: summary and background
1 CLO methodology RFC: summary and background
Slide 4: Summary of the proposal
Summary of the proposal Existing mechanics We infer the default probabilities of the obligors included in a CLO from the Moody’s Default Probability Rating of each obligor. Currently, we analyze an obligor whose ratings we have placed on review or to which we have assigned a negative outlook as foll
Slide 5: Summary of the proposal - impact
Summary of the proposal - impact Impact on On average, Moody’s calculated WARF is expected to improve by about 10% (or slightly more WARF than 300 points) from the current averages of 3272 for US CLOs and 3295 for European CLOs. ▪ Our modeling of CLOs typically assumes certain portfolio-wide charact
Slide 6: Summary of the proposal - background
Summary of the proposal - background Background In our current modeling approach to rating collateralized loan obligations (CLOs) we adjust the rating levels of individual corporate obligors where we have assigned negative outlooks or have placed rating on review for upgrade or downgrade. These adju
Slide 7: Empirical background
Empirical background 1 2 3 Rating reviews are strong Outlooks convey meaningful Rating reviews provide stronger predictors of near-term rating information about rating signals than rating outlooks actions and, on average, ratings transitions over the medium and about future rating transitions in cha
Slide 8: Average rating migrations for reviews and outlooks
Average rating migrations for reviews and outlooks On average, ratings move one notch upon conclusion of a rating review and half a notch upon conclusion of a positive or negative outlook Average rating change upon conclusion of a rating review or outlook » The chart shows the average rating January
Slide 9: Probability of rating transition
Historical rating transition rates Most rating reviews conclude with a rating change while most outlooks do not Average rating transition rates upon conclusion of a rating review and outlook » The chart shows the proportion of ratings January 2000 – July 2020 that were upgraded, downgraded or Rating
Slide 10: Description of prediction delta analysis
Description of prediction delta analysis The prediction delta framework allows us to assess the Adjust methods considered in prediction delta analysis informational content of watchlists and outlooks to help Adjustm ent to current rating (in notches) Adjustm ent Review for Negative Positive Review f
Slide 11: Results of prediction delta analysis
Results of prediction delta analysis -1, 0, 0, +1 notches adjustment method is near-optimal in both stages 1st Stage Results 2nd Stage Results Average prediction deltas calculated for rating reviews and outlooks Average prediction deltas calculated for rating reviews only January 2000 – July 2020 Ja
Slide 12: Current CLO Landscape: Credit metrics continue gradual recovery despite pickup in defaults
2 Current CLO Landscape: Credit metrics continue gradual recovery despite pickup in defaults
Slide 13: Corporate default rates are rising
Corporate default rates are rising • US speculative-grade default rate expected to peak at 11.4%, by Q1 2021 • CLO defaulted-asset holdings increased, but remain low at an average of 2.1% US speculative grade one-year default rates % of US CLOs by defaulted-assets holdings (%) in their portfolios US
Slide 14: US CLO WARF continues to improve as of Sept
US CLO WARF continues to improve as of Sept Trustee reported WARF March 2020 Moody's WARF May 2020 Moody's WARF Sept 2020 2912 3412 3272 2300 2500 2700 2900 3100 3300 3500 3700 3900 4100 4300 4500 BSL CLO WARF March 2020 May 2020 September 2020 WARF Average 2912 3412 3272 WARF Std. dev. 230 326 292
Slide 15: WARF improved in most US CLOs, while changes in OC were uneven
WARF improved in most US CLOs, while changes in OC were uneven across transactions Sub. (Ba) OC Improvement 4.0 May-Sep change % of reinvesting CLOs 3.0 Improved WARF & OC 60% Improved WARF/Deteriorated OC 35% Improved OC/Deteriorated WARF 3% 2.0 Deteriorated WARF & OC 2% Total 100% 1.0 WARF Improve
Slide 16: Most watchlisted US CLO ratings have been resolved
Most watchlisted US CLO ratings have been resolved Downgrades concentrated at Ba/B level Broad rating category Watchlisted tranches Resolved Aaa (sf) 0 NA Aa (sf) 9 89% A (sf) 74 86% Baa (sf) 426 87% Ba (sf) 441 86% B or below (sf) 186 89% Total 1136 87% Source: Moody’s Investors Service as of 28 Se
Slide 17: Credit performance, transaction features drive rating action differences
Credit performance, transaction features drive rating action differences More negatively impacted CLOs exhibited worse WARF breaches and OC erosion Average Sept WARF Average WARF Breach (points) Sub (Ba) OC level Sub (Ba) OC change since March 3450 500 108.0 0.0 447 Sub (Ba) OC change since March WA
Slide 18: European corporate default rates to rise but less than in the US
European corporate default rates to rise but less than in the US • Europe speculative-grade default rate expected to peak at 5.7%, by Q1 2021 • Half of European CLOs hold no defaulted assets in their portfolio Europe speculative grade one-year default rates % of Europe CLOs by defaulted asset holdin
Slide 19: European CLO WARF also improved as of Sept
European CLO WARF also improved as of Sept Trustee reported WARF March 2020 Moody's WARF May 2020 Moody's WARF Sept 2020 2981 3380 3292 2500 2700 2900 3100 3300 3500 3700 3900 4100 4300 4500 BSL CLO WARF March 2020 May 2020 September 2020 WARF Average 2981 3380 3292 WARF Std. dev. 88 163 140 Source:
Slide 20: WARF improved for most CLOs in Europe, but many deals saw OC deterioration
WARF improved for most CLOs in Europe, but many deals also saw OC deterioration Sub. (Ba) OC Improvement 4.0 May-Sept Change % of reinvesting CLOs Improvement WARF & OC 32% 3.0 Improvement WARF/ Deterioration OC 56% Deterioation WARF/ Improvement OC 7% 2.0 Deterioation WARF& OC 5% Total 100% 1.0 WAR
Slide 21: Most watchlisted European CLO ratings were resolved
Most watchlisted European CLO ratings were resolved Downgrades concentrated at single-B level Wa t c hlis t e d B ro a d ra t ing C a t e go ry t ra nc he s R e s o lv e d Baa (sf) 120 84% Ba (sf) 116 84% B (sf) 115 84% Tota l 351 84% Source: Moody’s Investors Service as of 28 September 2020 ➢ Avera
Slide 22: Credit performance, transaction features drive rating action differences
Credit performance, transaction features drive rating action differences More negatively impacted CLOs exhibited worse WARF breaches and OC erosion Avg. Sep WARF Avg. WARF Breach Avg. Sub (Ba) OC level Avg. Sub (Ba) OC change Mar-Sep 3450 277 300 112.0 0.0 Sub (Ba) OC change Mar-Sep (%) 3400 -0.5 25
Slide 23: Q/A
3 Q/A
Slide 24: Global CLO Webinar, Oct 2020
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history. © 2020 Moody’s Corporation, Moody’s Inves