00:00Credit rating firms are preparing big changes to how they evaluate CLOs or collateralized loan
00:05obligations. The revamp puts hundreds of deals and tens of billions of dollars of bonds in line
00:10for upgrades, potentially masking risks. Bloomberg's Rachel Graff covers leveraged finance and she
00:15joins us now. So Rachel, just give us a sense. What's the reasoning behind the changes to
00:19the methodology for CLO ratings? Sure. So Fisch ratings came out and finalized their changes and
00:26then a few days later, Moody's came out and both of them have said that this is basically just them
00:33updating their methodologies to better reflect the current environment that we are now in. And
00:39they're doing that by, for example, updating assumptions around leveraged loan defaults and
00:45things like that. Okay. So what's the expected impact of these changes that they're making?
00:50So that's where it gets a little interesting. They have both said that they expect these changes to
00:58result in only upgrades for CLOs. And so, like you said, potentially impacting hundreds of CLOs,
01:05tens of billions of dollars worth of bonds. And that makes these vehicles look safer. Some have said
01:15that that's a good thing. These bonds are underrated. They agree with the ratings agencies. It's overdue.
01:21And others have raised some concerns. Okay. Let's talk about the concerns that people have raised because
01:26we've been here before where things that are rated really high, AAA, for instance, turns out in a crisis,
01:33they're not AAA. That's right. Yes. So there's a couple buckets of concerns. One is the timing right
01:42now of the market, given the software disruption and the volatility there. Also, the Fed might be
01:50hiking interest rates, which makes borrowing costs more expensive. And then, like you said, there are
01:56some comparisons to the years preceding the 2008 financial crisis. At that time, some of the ratings
02:05agencies did what people have called a race to the bottom, where they were competing for market share
02:11by lowering their standards. And since this is only resulting in upgrades now, there have been some
02:18comparisons to that pre-2008 competition and, yeah, some concerns around that. Okay. So, and those are
02:27valid concerns. It's been a while, but they still exist. When you talk to people, are those concerns
02:32valid that they're competing against each other to rate these securities?
02:37The ratings agencies have said that's not the case. They've said that there are no competition
02:43considerations. However, as a CLO issuer, if one of the ratings agencies is going to give you a very
02:53positive rating, it makes your bonds look very safe, probably drum up more demand, it's hard as one of
03:00their competitors to not follow suit.
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