Over 400 CLOs Placed on Review for Upgrade, Raising Echoes of Pre-2008 Concerns
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Fitch and Moody's have updated their CLO rating methodologies in quick succession, potentially triggering thousands of bond upgrades worth tens of billions of dollars; critics warn the moves echo the pre-2008 race to loosen standards.
What exactly did the two agencies change?
Fitch moved first on June 1, revising its recovery-rate assumptions — how much investors get back after a borrower defaults. The new model weighs a loan's seniority, whether it is secured, and the borrower's jurisdiction.
Moody's followed four days later, targeting default-rate assumptions. It plans to use a broader, more recent dataset and add a test that gives more weight to a CLO's actual loan holdings rather than the risk caps written into deal documents.
This means → the two agencies entered from different angles, but the direction is identical: both argue old assumptions were too conservative, and the result is a wave of CLO upgrades.
How large is the upgrade wave?
Fitch flagged 767 U.S. CLO tranches — over $16 billion in face value across 304 deals — plus 434 EMEA tranches (132 deals) for review, expected to complete within six months. The anticipated outcome is upgrades only.
Moody's said roughly one-third of its rated sub-AAA CLO tranches would move up one to two notches; some low-leverage deals could gain three.
In plain terms = thousands of bonds worth tens of billions of dollars may be collectively "promoted" within half a year — not a tweak, but a systematic repricing.
Why are critics invoking 2008?
Former Moody's analyst Rod Dubitsky put it bluntly: "The scale alone won't blow up the market, but the signal it sends is — we're running the 2003, 2004, 2005 playbook and we don't care."
He flagged Moody's timing in particular: the proposed revision came barely a month after its latest CLO methodology was published, raising questions about whether competitive pressure is the real driver.
This means → post-crisis reforms curbed the rating agencies' race to the bottom but did not eliminate it. Two agencies moving within one week has some observers concluding that the old dynamic is resurfacing.
How real is the "ratings shopping" risk?
Palak Pathak, a senior portfolio manager at TCW Group focused on securitized credit, noted: "We may see CLO managers choose between agencies based on whose methodology favors their deals."
In plain terms = that is ratings shopping — issuers picking the most lenient agency, diluting the credibility of the ratings themselves.
Both agencies deny that commercial interests influence their criteria. Moody's says rating standards are set independently of business considerations; Fitch points to its governance process, with annual reviews and an independent committee approving any interim changes.
Why does the current market backdrop make this more unsettling?
The software sector is under pressure — it accounts for roughly 15% of U.S. CLO leveraged-loan pools and 10% of European CLOs, raising doubts about whether historically low default rates still reflect the risk building in today's portfolios.
Market expectations for Fed rate hikes in coming months are rising, which would push corporate borrowing costs higher and squeeze lower-rated tranches further.
This reflects a deeper tension: the agencies are using historical data to argue CLOs have been "underrated," but the current macro environment is precisely what makes that historical data less reliable.
What do supporters say — and what determines the outcome?
Thomas Majewski, founder of Eagle Point Credit Management — which manages roughly $14 billion in CLO assets — takes a different view: "The timing is a bit odd, but the direction is right. CLOs have been underrated for a long time."
Since the financial crisis, CLO tranche default rates have been far lower than similarly rated corporate bonds — the core evidence behind both agencies' methodological updates.
This means → the ultimate impact hinges on two things: Moody's final revised methodology after its comment period, and the market's judgment on whether mass upgrades reflect genuine credit improvement or merely competitive pressure between rating agencies.
Content is for reference only, not financial advice.