European managed synthetic collateralised debt obligations (CDO) tranches have historically suffered fewer downgrades than their static counterparts, according to data produced by rating agency Derivative Fitch.Jeffery Cromartie, a London-based director at the agency, said: “Every single year we see a smaller percentage of downgrades in managed versus static European synthetic CDOs.”
In 2006, the proportions of Fitch-rated managed and static synthetic CDO tranches downgraded were 2.75% and 8.01% respectively. From 2002 to 2006, the proportion of static synthetic tranches downgraded has been consistently higher than the proportion of managed tranches, by an average multiple of 2.5. In 2006, the average severity of downgrades for static synthetic tranches was higher for static synthetic tranches by -0.6 notches, although this is inconsistent with previous years.
According to the agency, the proportion of tranches upgraded was roughly the same for managed and static synthetic CDOs in 2006. From 2002 to 2006, the number of static synthetic tranches upgraded was higher. However, this is largely a result of static synthetic CDOs de-leveraging towards maturity – something that does not usually occur in managed deals.
Derivative Fitch also investigated whether ratings cushions or Weighted Average Rating Factors (WARF) would have improved or not, if a selection of five managed portfolios had been left unmanaged over time. “[This] was interesting, in that it was all over the place,” said Cromartie. It found that in most cases the ratings cushion or WARF of the deals had improved, but in two cases (according to at least one of the metrics) managers had actually impaired the performance of deals.
The findings were presented at Derivative Fitch’s CDO Manager and Investor Workshop in London.
More on Credit Derivatives
UBS in Australia sold off CDS portfolio in fixed income scale-back
Fears relationship between credit indexes and constituents becoming more tenuous
A new product could smoothe the gap between capital and accounting rules
Banks can use maths - rather than special chips - to boost computing speed
Sign up for Risk.net email alerts
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
Isda directors warn on fragmentation, access and liquidity - but expect problems to pass
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.