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Moody's: Nearly half of ratings rise after application of new loss-given-default methodology
By Angela McDaniels
Seattle, Oct. 23 - Moody's Investors Service said that upon application of its new loss-given-default methodology, 47% of the affected debt ratings remained unchanged, 45% were upgraded and 8% were downgraded.
In September, the agency applied its loss-given-default methodology to over 1,000 speculative-grade companies based in the United States and Canada with more than 3,000 rated debt instruments.
After reviewing the effects of applying the methodology to debt ratings, Moody's found that:
• Upgrades were more common among secured classes of debt, with 67% of first-lien debt instruments being upgraded by an average of one notch. Only 23% of senior unsecured debt instruments, in contrast, were upgraded, while 61% saw their ratings unchanged and 16% were downgraded;
• The upgraded debt instruments rose by an average of 0.54 notches;
• About 18% of Caa-rated debt instruments were upgraded to B, 33% of B1-rated instruments were upgraded to Ba3 and 14% of Ba1-rated debt instruments were upgraded to investment-grade;
• About 3% of the B-rated instruments were downgraded to Caa; and
• There were only 14 two-notch downgrades, and there were no three-notch downgrades.
"Moody's developed its loss-given-default methodology in response to research demonstrating that losses for loans were lower than that for equivalently rated bonds, as well as in response to strong market interest in the disaggregation of ratings into their two components: probability of default and severity of loss," Moody's senior vice president Russell Solomon said in an agency release.
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