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Abstract |
Summary
Moody's ratings rank order credit risks with respect to expected loss rates, which reflect the product of the probabilityof default and expected severity of loss in the event of default.
Speculative-grade issuers' bank loans are, therefore, generally rated higher than their bonds, because loans typically benefit from higher seniority and greater collateralization which should result in lower expected loss rates.
This case for higher ratings on loans relative to bonds is strongly supported by Moody's research, which shows that both default rates and loss severity rates are significantly lower for loans than for bonds issued by the same obligor.
Recent research, however, suggests that for a non-financial speculative grade obligor's loan and bond ratings, even the usual one or two rating notch differentiation fails on average to sufficiently capture the difference in experienced loss.
Moody's rating committees will consider these historical research results as they calibrate obligors bond and loan ratings, when differences in seniority and collateral are material. Since individual rating conclusions require careful analysis of the issuer's capital structure, as well as loan collateral and covenants, it is not possible to say in advance which currently rated loans are likely to be upgraded over time.
While the bulk of Moody's bank loan ratings and, consequently, the bulk of this research pertains to North American corporate issuers, Moody's employs the same broad analytical approach in other geographical regions. Within the context of each region's particular credit environment, Moody's assigns ratings to loans and bonds that reflect the expected credit loss implications of their structural features and collateral. Moody's intends to continue monitoring loss data on corporate issuers, both inside and outside of North America, and adjust ratings where necessary to equate expected loss rates across similarly rated loans and bonds. |
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