DBRS Reduces Notching Latitude for Leveraged Finance

DBRS has today released a revised methodology for rating leveraged finance companies that reduces the latitude for notching. First, the anticipated recovery for achieving an RR1 has been increased to 100% and above from 90% to 100%. Second, the ability of unsecured debt to achieve up to three notches above the issuer rating as warranted has been changed to a maximum of one notch above the issuer rating, which effectively means that any unsecured debt issued by a leveraged finance entity will be treated no better than an RR3, regardless of the recovery strength. Lastly, DBRS notes that any situation that either takes a rating up by the full three notches or moves the secured rating into the BBB (low) category is not the norm and will require more resilience than demonstrated simply by using the notching matrix.

DBRS has taken no rating actions as a result of these revisions. All of the aforementioned changes can be found by reviewing page 7 of the revised DBRS methodology.