Mind the CCC Bucket

Research evidence excerpt

Mind the CCC Bucket

Global Foundation

July 8, 2026 02:34 PM GMT

Morgan Stanley & Co. LLCMGlobal Loans & CLOs Joyce Jiang

Strategist

Mind the CCC Bucket Joyce.Jiang@morganstanley.comGabriel Reyes Esclasans +1 212 761-0165

Gabriel.Reyes.Esclasans@morganstanley.com +1 212 761-4134

We expect AI concerns to drive more CCC downgrades in the Eva C Baurmeister

next 12 months, translating into weaker CLO quality metrics. The StrategistEva.Baurmeister@morganstanley.com +1 212 761-4588

impact on CLOs will be meaningful but still manageable, with Morgan Stanley India Company Private Limited+

wide dispersion across managers. Mayank Verma

Mayank.Verma@morganstanley.com +91 22 6995-3508

Key Takeaways

Morgan Stanley & Co. LLC

We project the gross downgrade rate from B- loans to increase to ~16% by mid- James Egan

2027. In contrast to 2023, downgrade pressure will be less intense and highly StrategistJames.F.Egan@MorganStanley.com +1 212 761-4715

concentrated within software names facing near-term maturities, which Vishwas Patkar

contribute to over 60% of the projected CCC downgrade pipeline. Strategist

Vishwas.Patkar@morganstanley.com +1 212 761-8041

We introduce a framework to analyze the impact of CCC downgrades on CLO

portfolios, by 1) dividing the loan cohorts based on sector, maturity profiles, and

trading prices, 2) assigning downgrade assumptions to each cohort, and 3)

estimating the aggregate downgrade rates at the individual portfolio level.

Under our central scenario, the impact on CLOs is sizeable but manageable. CCC

exposure rises to 6.9% and MVOC falls by ~70bp for BBBs and BBs, implying

21bp and 42bp widening, respectively, based on history. The repricing reinforces

our expectation of a steeper credit curve and supports our up-in-quality call.