Banking & Capital Markets

Moody’s to Boost Corporate Loan Ratings

''We've been telling the market for two years our loan ratings are too low,'' says a Moody's executive.
Stephen TaubMay 17, 2006

U.S. corporate borrowers may save as much as $4.6 billion a year in interest when Moody’s Investors Service completes a two-year, two-step review of the $1.2 trillion of loans it monitors, reported Bloomberg.

Kenneth Emery, director of syndicated loan research at Moody’s, told the wire service that ratings on loans will probably rise, on average, by one to two levels when it rolls out its new system later this year.

Loans typically enjoy higher credit ratings than bonds — and therefore lower interest costs — because they are a more senior asset class, said Emery. As a result, he added, lenders are able to get paid more than twice as much as bondholders when companies default on their debt or go bankrupt.

U.S. companies have borrowed a record $195 billion in high-yield loans so far this year, according to the wire service, as banks have charged the lowest premiums ever compared with the most-popular benchmarks. Bloomberg observed that the Moody’s upgrade could pare those premiums by about 64 basis points, or $6.4 million for every $1 billion borrowed.

“With the Moody’s changes, you’re going to see spread compression,” Seth Katzenstein, a managing director at GSC Partners, which manages $10.7 billion of bonds and loans, told the wire service.

When the ratings service completes its review, it may upgrade as many as 60 percent of loans that have first claim on a company’s assets, according to Moody’s senior vice president Russell Solomon.

The wire service explained that Moody’s currently ranks most loans at less than one level higher than its corporate family rating — typically the same or better than a borrower’s bond ranking, according to Bloomberg. Moody’s and other experts now reportedly feel that this is too low, given that lenders usually have the first claim on the assets of troubled companies.

“We’ve been telling the market for two years our loan ratings are too low,” Emery told Bloomberg. “Loan recoveries have turned out to be higher than anticipated.”