A spate of CDO restructurings in Japan for non-rated transactions are in the cards in the run up to Basel II implementation. "[Investors] need to get non-rated assets off their balance sheets," said a credit structurer in Tokyo. Credit officials estimated about 10% of outstanding CDOs in Japan are unrated and this will become a major issue for banks--the focus of Basel--who invested in the structures. The Bank for International Settlements' ruling is expected to treat such CDO deals as equity positions, requiring capital to be deducted fully to match such positions one for one, which will be costly.
In recent years a handful of investors comfortable with the risks of holding CDO portfolios and the methodology provided by their bankers opted out of obtaining ratings in order to pick up an additional 20 or so basis points on their transactions, noted credit officials. The structuring head noted regional banks with such CDO portfolios have the option to seek out rating agencies directly, sell the CDO back to the issuer which could then handle the ratings process and then buy it back, or sell it off for good. He further added that the majority of deals will likely be restructured, and some credits in the portfolio could be changed for the remainder of the deal.
