NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) releases its inaugural research report on Collateralized Loan Obligations (CLOs) and the leveraged loan market. The report, “What is the Loan Market Telling Us?” analyzes CLO portfolios by comparing underlying loan prices to ratings reported in trustee reports. KBRA’s analysis highlights certain instances where the market’s view may differ from the ratings assigned.
As KBRA expands into other asset classes, including CLOs, we believe it’s important to go in eyes wide open and consider as much available information as possible. There are multiple indicators of credit risk that can be considered when forming a credit opinion on an underlying obligor. The inclusion of various factors allows for a more robust analysis where each input may capture its own unique perspective on risk. KBRA acknowledges that one such observable measure of risk, driven by market participants, is price. KBRA believes that at times, price may be a good leading indicator of the market’s perception of credit risk.
The publication also provides key takeaways, including:
- A Discount Margin (DM) can be inferred directly from a loan’s price and used to compare against the minimum rating for each loan within a CLO.
- A KBRA Market Implied Risk (K-MIR) level can be derived by setting a DM range for each category.
- K-MIR1 can be a useful tool for cross-deal comparison or for stratifying risks within a transaction to assess the overall risk profile of CLO collateral.
- More than one-third of loans with a minimum reported rating of B have a K-MIR at least one notch higher.
- Differences may be attributed to notching requirements in CLO indentures or market expectations that differ from assigned ratings.
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KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
1 The K-MIR is a market price derived metric and is not a KBRA credit rating. For purposes of this research article, the K-MIR is mapped using the same scale and reported in lowercase letters.