ARC Ratings bases the rating of a CLO tranche on its default probability. The modelling approach estimates the DP using two main tools; Stochastic model to compute the default distribution and a cash flow model that relates the asset default scenarios to the cash flows received by each rated tranche. Further, the assessment typically includes a review of the issuer, including bankruptcy remoteness, a review of all transaction documents and the necessary legal opinions. The manager’s ability to manage the transaction in keeping with the documentation is also assessed given the potential impact on the CLO. After the rating is assigned ARC Ratings ongoingly monitors relevant credit metrics and counterparty risk.
Collateralized Loan Obligations (CLO) Rating Criteria
26 Feb 2021
- Ashley Thomas
- Co-Head of Structured Finance (UK)
- Stefan Augustin
- Co-Head of Structured Finance (EU)