DBRS Revises Loan Rating Methodology
June 10, 2009
DBRS on Tuesday released an updated version of the ratings methodology it uses to rate leveraged loans.
The change specifically applies to the method DBRS uses to “notch up” the ratings of loans. Under the revised policy, the result of any “notch up” of a high yield issuer will be limited to a triple-B rating, regardless of the level of the recovery rating that may have been assigned to the instrument.
When assigning ratings to leveraged loans, DBRS first assigns an issuer rating that reflects the default risk of the issuer, then the agency assigns separate recovery ratings and instrument ratings that are specific to the issuer’s debt. The instrument rating is a blend of the issuer rating and the recovery rating and, therefore, can be notched up from the issuer rating when the recovery rating reflects above-average prospects for a post-default recovery. The instrument rating can also be notched down in cases where the recovery rating reflects diminished recovery prospects.
The goal of this revised methodology is to “lessen the weighting of recovery on the instrument ratings of non-investment-grade credits that are on the cusp of becoming investment grade,” DBRS said in a release.
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