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Moody's Adds CDO `Sensitivity' Grades After Criticism


By John Glover

May 14 (Bloomberg) -- Moody's Investors Service plans to add new grades for collateralized debt obligations to show their ``sensitivity'' to market declines after the securities contributed to $335 billion of bank losses and writedowns.

Ratings of CDOs, which pool bonds, loans and other assets, will include a score indicating the risk of price declines triggering a downgrade, the New York-based firm said in an e- mailed statement today. Moody's will also signal any uncertainty it has about the assumptions used to rate CDOs.

Moody's, Standard & Poor's and Fitch Ratings have come under scrutiny from lawmakers and regulators for assigning top ratings to debt that later slumped to as little as 10 cents on the dollar. While Moody's is adding new grades to CDOs, it plans to stick with the ratings scale created by founder John Moody about a century ago as its main indicator.

``Investors want more information about structured finance and ratings, and about the ratings process,'' Noel Kirnon, head of global structured finance at Moody's in New York, said in a telephone interview. ``We're giving an insight into how we rate, an insight into ratings stability and transition risk.''

The change in CDO ratings is one of the first overhauls at Moody's since Chief Operating Officer Michel Madelain began taking over day-to-day management of the company this month, replacing President Brian Clarkson.

``These two measures will provide more clarity about the credit characteristics of structured finance ratings,'' Madelain, 52, said in the statement. ``They will provide investors greater insights into the risks of structured finance products.''

Moody's indicators will be introduced ``gradually'' starting at the end of June, it said in the statement. The additional grades will only apply to new issues.

Moody's received comments on its plans from more than 200 investors holding more than $9 trillion of fixed-income securities in total, the company said.

S&P said last week it will keep a single credit ratings scale for all the markets in which it operates.

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: May 14, 2008 08:59 EDT