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.