ESMA highlights risks in CLO ratings market

Published: 11 December 2023

ESMA highlights risks in CLO ratings market

On 7 December, the European Securities and Markets Authority (ESMA) published a final report on EU CLO ratings, which highlights that certain practices in CLO ratings can lead to potential conflicts of interest.  

The report focuses on the risk of conflicts of interest surrounding Credit Rating Agencies (CRAs) and their CLO ratings methodology changes.  It follows a thematic investigation, which found that:

  • Changes to CLO rating methodologies produced significant market fluctuations and have developed in parallel to the loosening of underwriting standards.
  • Market outreach activities can potentially impair the accuracy, objectivity and independence of CLO credit ratings.
  • There are risks that some market participants may try to influence credit rating decisions. 

ESMA recognised that all investigated CRAs have procedures in place to identify, manage and mitigate the risk of conflict of interests.  However, ESMA observed that the controls around other forms of commercial influence are less developed.  ESMA has contacted CRAs to direct them to make remediations in their policies where necessary.

For further information, please contact Guillermo Pérez Molina, Private Credit Associate.