Loans may see rating upgrades as Moody's study finds that losses are less than similarly rated bond losses

By Sara Rosenberg

New York, Dec. 7 - Historical credit loss rates on speculative-grade syndicated loans have been on average 1.5 to two times less than on similarly rated bonds, which may mean that ratings have been inefficient in capturing the difference in losses, according to a new study done by Moody's Investors Service.

And, based on this new information, rating upgrades in some syndicated loans may be warranted.

"As a practical matter all loan ratings will likely be reviewed. There will be selected upgrades over the course of the next year," Pamela Stumpp, a managing director and Moody's chief credit officer for North American corporate credits, told Prospect News on Tuesday.

Stumpp went on to say that loans rated in the B range will likely be the group most affected by this new study, and to a lesser extent, loans rated in the Ba range will be affected as well.

"Moody's expects to reflect these findings in its ratings of bank loans, with continued attention paid to the seniority and collateral of the loan," Stumpp said in a Moody's release. "Since individual rating conclusions require detailed analysis of the obligor'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."

The study looked at three-year cumulative loss rates on similarly rated North American loans and bonds issued by nonfinancial corporations between 1996 and 2001.

"In this sample, we find that loss rates would have been similar for loans and bonds if the loans had been rated higher by about 0.5 to 1.5 alpha-numeric rating notches," said Kenneth Emery, the study's primary author and Moody's director of loan default research, in the release.

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