7Debt tranches & ratings

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CLO debt makes up more than 80% of all CLO liabilities in existence. Almost all of them are rated.

A credit rating is an opinion about the riskiness of a bond using a standardised scale. Many CLO investors use ratings as a way of showing to their clients or regulators that they are choosing investments with an appropriate level of risk.

The rating on a CLO note is derived from the credit rating of the individual loans and other assets in a CLO. If the underlying loans are not rated, the CLO needs to pay for shadow ratings on the loans.

CLO investors receive detailed and somewhat standardised reports on the performance of the deal. The most frequent of these “trustee reports” is the monthly report which lists all a CLO’s assets, details its recent purchases and sales and measures the extent of its compliance with all tests.end

 

 

A typical ratings history: Moody’s ratings on Madison Park Funding I

Aaa

Aa1

Aa2

Aa3

A1

A2

A3

Baa1

Baa2

Baa3

Ba1

Ba2

Ba3

B1

B2

B3

Caa1

Caa2

Caa3

Ca

C

AT
AVF
B
C
D
E

Source: CLO-i.

 

 

 

Turn to the print version of the CLO guide to find out:

How correlation between the default risk of all the individual loans in the CLO portfolio affects the ratings of CLO notes.

The key differences between Fitch, Moody’s and Standard & Poor’s in their approach to rating CLOs.

Typical upfront and ongoing rating agency fees.

How shadow ratings differ from conventional credit ratings.

The difference between refinancing and repricing a CLO note.

The most important different types of CLO debt, including oddities such as fixed rate CLO notes, class X tranches, combination notes and step-ups.

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