DBRS Publishes Updated Recovery Rating Criteria for Non-Investment Grade Corporate Issuers with Rating Impact

DBRS has today published an updated version of the criteria that was previously entitled “Rating Leveraged Finance” and is now entitled “DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers”. DBRS notes that there are some material changes and additions to the criteria:

(1) DBRS has refined its approach and will now differentiate between issuers rated in the BB range and issuers rated B (high) and lower. In addition, for issuers with an issuer rating in the BB range, the level of potential upward notching has been reduced, with the elimination of an issuer’s ability to receive three notches of elevation, regardless of recovery strength.

(2) For issuers rated B (high) and lower, the recovery levels required for the RR2 and RR3 ratings are now more conservative, thus moderately reducing the ability of specific securities to achieve upward notching due to recovery strength. In addition, only RR1 ratings of issuers rated B and below will now be eligible to receive a full three notches of elevation.

For clarity, an RR3 rating will now require at least 60% recovery (previously 50%) and an RR2 rating will now require at least 80% recovery (previously 70%), while RR1 ratings continue to be defined as “100% and over” recovery. RR1 and RR2 ratings will only be appropriate in select cases.

In distinguishing between B (high) or lower and BB-rated issuers in its recovery rating methodology, DBRS has acknowledged the higher level of difficulty in forecasting a default scenario for issuers rated at the upper end of the non-investment grade category, and believes that this tougher standard for BB-range issuers is an appropriate way of smoothing the transition in recovery rating scales between non-investment grade issuers (whose debt instruments are subject to this recovery criteria) and investment grade issuers (who are not subject to any recovery criteria).

As a result of the material changes to the criteria, DBRS has concurrently taken the rating action of placing the BB-rated Senior Secured Notes of Norbord Inc. Under Review with Negative Implications (see separate press release). There were no other rating changes or rating actions caused by the update of the criteria.

DBRS criteria and methodologies are publicly available on our website, www.dbrs.com, under Methodologies.