Correction: Fitch Formalizes Use Of Recovery Ratings For CLO Ratings.

NEW YORK & LONDON -- This is a correction for a previous message. Fitch's Recovery Ratings are triggered for issuers with IDRs rated 'B+' and below.

Fitch Ratings has published its finalized methodology to incorporate its Recovery Ratings into the ratings of Collateralized Loan Obligations (CLOs) thereby capturing a more fundamental, granular view of the underlying assets to more accurately determine the credit loss profile of the CLO collateral portfolio.

As leveraged loan issuance continues its record pace the ability to better distinguish relative risk across complex organizations and/or capital structures and the components of that risk have become increasingly important. To further transparency in this market, last year Fitch introduced Recovery Ratings for all corporate and financial issuers rated 'B+' and below, affecting nearly $475 billion of securities issued by highly speculative companies.

Fitch's Recovery Ratings (RRs), on a scale of 'RR1' (outstanding) to 'RR6' (poor), are established using a bespoke analysis comparing distressed enterprise values against a given security's position in the capital structure. Fitch focuses primarily on ultimate recoveries, although the recovery analysis uses stressed cash flow scenarios and realistic enterprise valuations.

Incorporating RRs into the analysis of CLOs allows Fitch to capture a more fundamental and granular credit view of the underlying loans of a CLO. In addition to providing differentiation between senior secured leveraged loans, this initiative is well-timed to better differentiate second-lien, mezzanine and middle-market loans which are increasing in allocation in many new CLO portfolios. These types of loans may exhibit wider recovery characteristics versus the more typical senior secured leveraged loans. The homogenous asset class and seniority based assumptions that have been previously used do not recognize issue-specific strengths and weaknesses, and in the case of newer types of loan collateral, these assumptions may carry greater risks. In addition, it enables managers and investors to more accurately determine the credit loss profile of the CLO collateral portfolio. Fitch also outlines the use of a weighted average recovery rate (WARR) covenant and its implementation into Fitch's CLO cash flow modeling rating criteria.

"CLO managers and investors will have greater transparency on the collateral loss profiles, and managers will have a more precise tool to manage the portfolio asset allocation," said Senior Director Shaun Baddeley.

The new analysis will be applied to both new and outstanding CLOs, though Director Alla Zaydman says that the greatest effect will likely be on new CLO issuance. "Investors may welcome the greater certainty of a collateral loss profile that a weighted average recovery rate covenant would provide, especially as many CLO issuers expand into second-lien and mezzanine loans that have much less certain recovery expectations," said Zaydman.

Fitch's refined CLO criteria is also applicable to CDOs of high yield corporate bonds. 'Criteria for Use of Recovery Ratings in Collateralized Loan Obligations Ratings' is available on the Fitch Ratings web site at www.fitchratings.com.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.