Agencies Prep Leveraged Super Senior Rating Models
The three major rating agencies are set to launch public models which will allow investors in leveraged super senior collateralized debt obligations to gauge the likelihood of trades hitting embedded triggers and unwinding.
The three major rating agencies are set to launch public models which will allow investors in leveraged super senior collateralized debt obligations to gauge the likelihood of trades hitting embedded triggers and unwinding. The models quantify the possibility of hitting the triggers, said Cian Chandler, associate director in structured finance ratings at Standard & Poor's in London. "This will allow investors to run scenarios using their own views on the market," he said.
The models expand existing CDO rating criteria, which already cover default and market value losses, to include spread-based triggers. "Spread-based loss is a completely different story and we had to build a new methodology," said Paul Mazataud, managing director in the CDO group at Moody's Investors Service in Paris, which will launch its model in the next fortnight. S&P's model is expected before summer's end, while Fitch Ratings is yet to announce a launch date.
The models, which differ between agencies, analyze the default or rating migration of the underlying portfolio against simulated credit spreads at set time periods, some as detailed as daily. Cheiron Osako, director in credit derivatives at Fitch Ratings in London, said his group's model also considers the direct impact of defaults on market spreads and adjusts correlation to compensate for modeling trades in smaller time-steps, as well as for rating migration.
Market officials said all three models will ease investor fears of triggers (DW, 7/25) and bring greater transparency to leveraged super senior deals, which aim to lure buyers with boosted returns, but no dilution of the tranches' high credit rating. One structuring official said he was surprised how quickly the rating agencies had come to terms with spread-based triggers, but agreed they would help fulfill the need for investor comfort.