Scope Ratings today publishes its final CLO Rating Methodology, with no changes compared to the proposed methodology published on 3 April 2019 other than minor editorial changes. The methodology primarily applies to collateralised loan obligations (CLOs) backed by a portfolio of broadly syndicated corporate leveraged loans. It offers a flexible framework for the analysis of transactions presenting comparable characteristics such as leveraged loan warehouse facilities or certain collateralised debt obligations (CDOs).

Methodology highlights

• Greater differentiation based on asset manager quality and performance. Scope’s analysis relies on transaction-specific input assumptions to factor in the track record of the asset manager on expected portfolio losses. The agency uses a fundamental bottom-up approach and sequentially analyses the asset manager, the assets, the portfolio and the structure, taking into account the considerable discretion left to the asset manager. The analysis of the asset manager is therefore a key part of the rating process and includes a review of its corporate structure, skills, expertise, processes, performance and track record. These findings impact assumptions and influence Scope’s overall assessment of a transaction.
   
• Stable senior protection. The methodology ensures stable protection buffers through the cycle for the most senior ratings. Scope’s assumptions and application of various stresses align with its fundamental view on the performance of CLO notes. For example, protection buffers for BBB_SF rated CLO notes are designed for tranches that are unlikely to suffer losses in an environment whose default rates correspond to historical peaks since 1980. Similarly, protection buffers necessary to support a note rated AAA_SF shall allow senior tranches to withstand environments with exceptional levels of default, i.e. with rates in excess of historical peaks for an extended period.
   
• Transparent model portfolio. The composition of the collateral pool will evolve with the asset manager’s strategy and credit views. Scope constructs a model portfolio that best represents the collateral pool’s risk profile throughout the life of the transaction, building on the results of the asset manager analysis and asset analysis. Details of the initial portfolio at the closing date, the asset manager’s ramp-up plan, and structural features such as maximum portfolio concentrations, trading limits and collateral quality tests also shape the model portfolio.
   
• Flexible use of available portfolio metrics. The Scope weighted average loss factor (WALF) is a key portfolio loss metric consistent with the agency’s expected loss framework. Together with metrics on a portfolio’s credit quality and default-weighted recovery rate (Scope WARF and WARR), Scope brings to the asset manager a flexible set of measures for dynamic portfolio management within pre-defined limits. The methodology, however, also allows the agency to rate instruments based on industry standard metrics if these are already available in the transaction.

The expertise and recent growth of Scope’s corporate ratings team support Scope’s fundamental approach and forward-looking asset-specific analysis.

The CLO Rating Methodology complements the General Structured Finance Rating Methodology and should be read in conjunction with the Methodology for Counterparty Risk in Structured Finance. The publication of this methodology has no expected rating impact on outstanding transactions rated by Scope.

Download the methodology here or on www.scoperatings.com