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Moody’s Investors Service said it may cut the ratings on $22 billion of U.S. collateralized loan obligations — a fifth of all such bonds it grades — after the Covid-19 pandemic eroded the financial standing of American companies backed by the securities.
The ratings firm took the action on859 bonds from 358 CLOs that package leveraged loans into securities of varying degrees of risk and return, according to a statement late Friday. The step — which affects about 19% of Moody’s-rated CLOs that purchase broadly syndicated loans — comes as the underlying debt gets downgraded at a record pace.
Expected losses on the CLO securities Moody’s rates have “increased materially,” it said. The pandemic has erased earnings at businesses, leading credit quality to deteriorate. More than 40% of the bonds on review have an investment-grade rating, with 13 rated A, and 355 rated at the Baa level. The rest have sub-investment ratings through to CCC.
CLOs are the biggest buyers in the $1.2 trillion leveraged loan market, which in recent years fueled a boom in debt-fueled buyouts and other transactions. But the loans have been particularly hard-hit in the market rout triggered by the pandemic, with a benchmark index plunging last month to the lowest level since the global financial crisis. The index has recovered some of its losses in recent weeks.
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