Moody's Investors Service will, for the first time, release its methodology for rating collateralized debt obligations referenced to credit-default swaps. Yuri Yoshizawa, v.p. and senior credit officer in New York, said the methodology will also include a new haircut on recovery rates. The rating agency has analyzed CDOs referenced to corporate debt since 1997, but this will be the first time it has come out with a consolidated explanation of the processes and factors it looks at to rate the deals on a global basis, she said. Moody's plans to release the methodology this week. Fitch Ratings has already published its ratings criteria and Standard & Poor's plans to (DW, 7/7).
"The synthetic market has grown to a point where we should put something out," noted Yoshizawa. Synthetic CDOs represented more than half of the European CDO market and accounted for 30% of U.S. volume last year. The International Swaps and Derivatives Association also published its 2003 credit derivatives definitions earlier this year, which added to the impetus.
The haircut will apply to securities that have hit default triggers and take into account the deal counterparty's cheapest-to-deliver option, Yoshizawa said. She added Moody's will assess a nominal haircut, declining to be more specific because the rating agency plans to publish an in-depth piece explaining it in the coming months.
