Moody's highlights rating sensitivity for 2011 CLOs

In Moody’s latest edition of CLO Interest, the agency gives an insight into its rating process for new CLOs. Moody’s also notes that the class of 2011 CLOs are stronger and more resilient compared to pre-crisis deals with subordination on triple-A notes now averaging 35%, which is 10% higher than on earlier deals.

By taking the average of three recent CLOs, Moody’s comes up with a model for a typical 2011 CLO (see table below). The ratings will vary however, depending on subordination, warf (a measure of portfolio quality) and warr (the recovery rates). A 1.5% increase in subordination for example will see classes C to E upgraded by one notch. Conversely a 1.5% drop in subordination results in a one notch downgrade for classes C and D but a two notch downgrade for the class Bs. Changes in warf and warr have a more muted effect on the ratings.

Investors in new CLOs also benefit from a number of features which have been implemented, according to the article. Among the changes are tighter reinvestment language, constraints placed on note cancellations and higher OC cushions.

Typical 2011 CLO