Credit events on synthetic collateralized debt obligations referenced to asset-backed securities are starting to become more standard as rating agency models have gotten more sophisticated. Crédit Agricole Indosuez tweaked the credit triggers on its latest deal, TRIPLAS 2, to fit Moody's Investors Service's methodology, according to a CAI official.
"Features unfairly in favor of buyers of protection are slowly getting drained out," according to Ebo Coleman, senior credit officer at Moody's in London. For example, structurers are now accepting that the bankruptcy trigger does not apply to ABS deals and are also moving away from cash settling ABS based on a market value taken within weeks of the event.
Moody's plans to publish a report this quarter clarifying its position on ratings criteria, valuation and modeling of CDOs of ABS, according to Paul Mazataud, managing director in Paris. Because there is no International Swaps and Derivatives Association definition for credit derivatives referenced to asset-backeds each bank uses its own criteria. The CDO structurers then adjust these criteria to satisfy Moody's rules, according to Mazataud. He added, however, that there is not one set way of meeting the rating agency's requirements.
Huxley Somerville, head of credit derivatives at Fitch Ratings in London, said Fitch is prepared to rate any deal with any set of definitions. He acknowledged, however, that deals were assigned a haircut if deemed to be more lenient than the rating agency's default study. For example, it aims to use a ratings threshold of CC for a default, but if a deal has a higher band, such as BBB, it will assign a lower rating.
The TRIPLAS 2 deal has four credit events, three are purely for the ABS and the fourth covers the CDO structure as well, noted the official. There is a downgrade trigger at Caa2, a failure to pay interest, a failure to pay principal and a write down measure for both the CDO and the ABS.
