Moody's Loan CDS-Implied Ratings: Methodology and Applications

Posted: 10 Mar 2008

See all articles by Christopher Mann

Christopher Mann

Moody's Investors Service; Bank of Tokyo-Mitsubishi, Ltd.

David T. Hamilton

Moody's Analytics

Date Written: February 1, 2008

Abstract

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

Suggested Citation

Mann, Christopher and Hamilton, David T., Moody's Loan CDS-Implied Ratings: Methodology and Applications (February 1, 2008). Available at SSRN: https://ssrn.com/abstract=1104480

Christopher Mann (Contact Author)

Moody's Investors Service ( email )

99 Church Street
New York, NY 10007
United States

Bank of Tokyo-Mitsubishi, Ltd. ( email )

Japan

David T. Hamilton

Moody's Analytics ( email )

7 World Trade Center
250 Greenwich Street
New York, NY 10007
United States
(212) 553-1695 (Phone)

HOME PAGE: http://web.mac.com/dthamilton

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