DBRS Requests Comments on Proposed Methodology for CLOs and CDOs of Large Corporate Credit

DBRS is requesting comments on proposed changes to the global methodology used to rate and monitor Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs) of large corporate credit.

Comments should be submitted on or before January 6, 2014. Please submit comments to the following email address: DBRSSCMethodology_Comments@DBRS.com.

DBRS publishes on its website all comments received except in cases where confidentiality is requested by the respondent.

The proposed revised methodology includes two documents, “Rating CLOs and CDOs of Large Corporate Credit – Request for Comment” and “Cash Flow Assumptions for Corporate Credit Securitizations – Request for Comment.”, and will support global ratings issued by DBRS, Inc., DBRS Ratings Limited, and DBRS Limited.

These methodologies are intended to supersede the current “Rating Methodology for CLOs and CDOs of Large Corporate Credit” and the current “Cash Flow Assumptions for Corporate Credit Securitizations,” published February 7, 2012.

Key changes to the methodology include:
• updates to the Stressed Default rate calculations, including a new “DBRS Diversity Model” that replaces the “DBRS Large Pool Model”;
• an increase to recovery rates for senior-secured loans, reflecting an increased expectation for recovery, particularly at the A (sf) through the BB (sf) stress levels;
• a decrease to recovery rates for senior unsecured bonds;
• a new stress for covenant-lite loans at the AAA (sf) and AA (sf) stress levels; and
• removal of regional correlation factors.

The new DBRS Diversity Model is a portfolio analysis tool that generates Stressed Default Rates for a given corporate portfolio based on parameters such as DBRS Risk Score, weighted-average life, and industry and obligor Herfindahl scores. During the comment period, the new model is available by request from DBRS. After the comment period, the model will be publicly available on www.dbrs.com.

The proposed methodology’s implications for outstanding ratings is generally expected to be positive, particularly for mezzanine CLO tranches supported by portfolios of senior secured loans. The implications may be developing to negative, particularly for CLO tranches supported by larger concentrations of second-lien loans or senior unsecured bonds.

To speak with an analyst or to request a copy of the DBRS Diversity Model, please call Glen Leppert regarding US CLOs or Simon Ross regarding European CLOs.

DBRS criteria and methodologies are publicly available on its website www.dbrs.com under Methodologies.

DBRS's rating definitions and the terms of use of such ratings are available at www.dbrs.com.