Synthetic collateralized debt obligation issuance picked up in November in advance of Standard & Poor's revisions to its synthetic CDO rating model taking effect. The rush to price deals is expected to carry through December--normally a heavy issuance month, anyway--with issuers hoping to take advantage of the final months of what many interpret as the agency's lenient rating system.
Given the market's opaque, private nature the flow evidence is anecdotal, but firms across the Street said they are trying to push synthetic CDOs through the pipeline before year-end. "Investors want to close trades by year-end," one analyst said. While the fourth quarter traditionally is busier than others, officials said lower-quality deals in particular are being rushed through because of the changes.
Early indications suggest the agency will lower its default-rate assumptions for higher quality corporate credits while raising them for lower quality credits. It may also raise correlation assumptions for inter-industry credits while lowering them for intra-industry credits. Issuers predict the net effect on ratings under the new model will be less favorable.
S&P is not marketing the model's revamp--a big departure from its current model--and is downplaying the significance of the changes. As one analyst put it, "The proposal is an admission its current assumptions are too easy"--compared with those of Moody's Investor Service and Fitch Ratings, its two main competitors. Nik Khakee, director of rating services, derivatives and synthetic CDOs at S&P in New York, did not return messages, and Adam Tempkin, a spokesman for S&P in New York, declined to comment on specifics, saying only that the agency revises its models periodically and is in the process of internally testing the updated assumptions.
"My impression is that it's not routine," said one trader. "The revision of default and correlation assumptions that lie at the heart of the CDO rating engine is infrequent," wrote Ashish Shah, co-head of credit strategy at Lehman Brothers in New York, in a recent report. "S&P's revisiting these parameters is, therefore, significant, especially because it is the first such instance since correlation markets became liquid." The goal of the revisions, analysts said, is to win back market share from Moody's--which gained on it after its own model restructuring last year.
Despite the pickup in issuance volume in the last few weeks, there is some concern that new deals may be delayed or hindered by uncertainty whether S&P will re-rate or adjust ratings on past issuances. Khakee and Tempkin did not comment on this by press time. Historically, agencies have avoided doing this, officials noted.
