PHILADELPHIA (AFX) - Moody's Investors Service will begin re-evaluating credit ratings on existing junk-rated loans in the United States and Canada on Sept. 18, a multi-week process that is expected to result in higher ratings for much of the $500 billion in speculative-grade bank loans.
The ratings agency has for months been working out the details of the new ratings system. The expected higher ratings could lower the cost of funding for speculative-grade issuers of loans and result in thinner risk premiums for the institutional investors who buy chunks of the debt.
While the rollout for existing debt will proceed on an industry-by-industry basis, all first-time issuers will be considered under the new system starting Sept. 6, Moody's said in a statement Wednesday.
The new system incorporates loss-given default assessments and probability of default ratings for non-financial speculative-grade issuers. Probability of default will measure the likelihood that an issuer will default on its obligations. Loss-given default will measure the anticipated loss in the case of a default.
Because loans are senior to bonds in a company's capital structure, their anticipated loss is likely to be lower, leading to higher ratings.
A comment period on the new methodology ran from January well into the spring, and Moody's officials said investors expressed concern that higher ratings will squeeze already slim risk premiums in the leveraged loan market.
Moody's analysts counter that the loan market has seen interest rates edge higher in recent months. Group Managing Director Michael Rowan also said the agency's old ratings on loans were often too conservative.
Probability of default ratings will be assigned to issuers, rather than specific debt instruments. Loss-given default ratings will be assigned to individual issues: loans, bonds or preferred stock.
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