DBRS Releases Final Methodology for CLOs and CDOs of Large Corporate Credit

DBRS has today published an updated version of the methodologies it uses to rate and monitor Collateralized Loan Obligations (CLOs) and Collateralized Debt Obligations (CDOs) of large corporate credit.

These methodology updates follow the conclusion of the Request for Comment period on January 6, 2014. No comments were received during the comment period, and no material changes were made to the final methodologies.

The revised methodologies, effective today, include two documents, “Rating Methodology for CLOs and CDOs of Large Corporate Credit” and “Cash Flow Assumptions for Corporate Credit Securitizations,” and will support global ratings issued by DBRS, Inc., DBRS Ratings Limited, and DBRS Limited. These methodologies supersede the documents published February 7, 2012 of the same names.

Key changes to the methodology include:
• updates to the Stressed Default Rate calculations, including a new DBRS CLO Asset 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 in 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 CLO Asset 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. The model is to be publicly available on www.dbrs.com.

The methodology’s implications for outstanding ratings are generally expected to be positive. However, the implications may be developing or negative for CLO tranches supported by larger concentrations of second-lien loans or senior unsecured bonds. The impact of the new methodology on existing ratings will be published separately.

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