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41. Corporate analysts, who are in charge of issuing credit ratings on the borrowers of the
underlying loans, play no direct role in the assignment of CLO credit ratings. Inputs from
the corporate analysts and recovery rates are fed automatically into the tools used for the
analytical assessment (unless new CLO credit ratings are being assigned in which case
the initial inputs are fed in manually). Corporate analysts do not participate in the
preparation of rating committee packages and typically do not participate in CLO rating
committees. The degree of segmentation of the rating process varies among CRAs, some
are more fragmented than others in their organisation of leveraged loans analysts, CLO
analysts, and within the CLO team. A smooth and ongoing exchange of information
between internal teams remains key to ensure a holistic assessment of CLO
creditworthiness and to detect adverse trends that may impact CLO creditworthiness (e.g.
specific industry risks, macroeconomic risks, and market practices).
The role of arrangers and their ability to compute indicative ratings
42. CRAs interact mostly with CLO arrangers (i.e. the investment banks that help to structure
the securitisation with the support of a law firm) and less frequently with CLO managers
(typically, for the purpose of obtaining clarifications on technical aspects, such as the
targeted CLO structure).
43. Generally, arrangers adopt a similar structure across different CLO deals. This has
contributed to the standardisation of CLOs deals in terms of transactions’ structure, which
further eases the assessment to be performed by the CRAs and ultimately by investors.
44. Arrangers are familiar with CRAs’ methodologies so their proposed CLO structure
generally reflects CRAs' methodological requirements for a targeted rating. Further, given
the transparency of CRAs’ methodologies, arrangers are able to derive indicative ratings
on their own by using specific tools provided by the CRAs or their own models.
45. Generally, the final choice of the two CRAs is made by the CLO manager and the arranger.
As they are able to compute precise simulations on indicative ratings, typically they can
identify which rating agencies would assign the best credit ratings for the different CLO
tranches.
Setting-up the CLO in internal systems and the preparation of rating committees
46. After the collection of the relevant information, CLO analysts proceed to the issuance of
preliminary ratings. CRAs issue these preliminary ratings at the pricing of a deal before
the underlying portfolio is fully constituted (during the ‘ramp-up’ period) by using
assumptions on the future assets that the CLO manager will purchase.
47. Preliminary ratings are typically assigned around four weeks after a CRA receives a rating
mandate. However, this timeframe is dependent on the workload of analysts and on the
specifics of the new transactions.
48. Data and analytical teams replicate the cash-flow modelling in the CRA’s IT applications
(rating tools). In most cases, the CRA's rating tool is specific to CLOs and is different from
the tools used for other SF ratings such as the Residential Mortgage Backed Security