Credit rating agencies are undertaking significant changes to how they assess Collateralized Loan Obligations (CLOs), which are bundles of leveraged loans. These revisions are poised to result in upgrades for hundreds of CLO deals, encompassing tens of billions of dollars worth of bonds. This move has reignited fears that structured credit products are being made to appear safer than their true risk profile suggests, drawing parallels to the lead-up to the 2008 financial crisis.
The revamp was initiated by Fitch Ratings on June 1, 2026, when the firm announced new evaluation criteria that could lead to upgrades for up to 15% of the securities it rates. Shortly after, on June 5, Moody's Ratings followed suit, proposing its own changes that are expected to lift approximately one-third of the tranches it rates. These changes are primarily driven by updated methodologies and the agencies' accumulated deeper dataset of default and recovery experience for CLOs, aiming to better align ratings with realized performance rather than redefining risk itself.
For example, Fitch affirmed 161 classes and upgraded 30 classes across 28 U.S. broadly syndicated loan (BSL) CLOs on August 3, 2026, based on these new criteria and improved portfolio performance. The upgrades are expected to predominantly affect investment-grade tranches below AAA, particularly AA tranches, with some potential for lower mezzanine tranches. While some investors may view these upgrades with skepticism, they are largely seen as a recalibration.
