Moody's Loan CDS-Implied Ratings: Methodology and Applications
Posted: 10 Mar 2008
Date Written: February 1, 2008
Trades in the LCDS market provide a new source of information about the credit risk of senior secured loans. In this paper we describe Moody's methodology for deriving its LCDS-implied ratings. Spread data is provided by Markit Group, and covers over 300 reference names starting in August 2006. In the second part of the paper we briefly present several analytical applications using the LCDS-implied data set. First, we review some risk management and relative value strategies using LCDS-implied ratings. We show how differences between Moody's loan ratings and LCDS-implied ratings (the ratings gap) help predict future Moody's rating changes. We also how these gaps predict future LCDS spread changes. Lastly, we demonstrate how portfolios of LCDS, including synthetic CLOs and LCDS indices, can be analyzed using the LCDS-implied ratings dataset in conjunction with the appropriate portfolio or CLO ratings model.
Keywords: LCDS, loan derivatives, LCDX, CLO, loan ratings
JEL Classification: G10
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