Moody's Investors Service will, for the first time, release its methodology for rating collateralized debt obligations referenced to corporate default swaps. Yuri Yoshizawa, v.p. and senior credit officer in New York, says 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 says. Moody's plans to release the methodology this week. In general, a rating agency putting out methodology on an asset class validates it as having grown beyond a critical mass.
"The synthetic market has grown to a point where we should put something out," Yoshizawa explains, noting that synthetic CDOs are more than half of the European market and accounted for 30% of the State-side volume last year. The International Swaps and Derivatives Association also published its new credit derivatives definitions earlier this year, adding to the impetus for Moody's to put out its own methodology now.
The haircut will apply to securities that have hit default triggers, and take into account the deal counterparty's "cheapest-to-deliver" option, Yoshizawa says. She adds 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. The cheapest-to-deliver risk "is something that everyone has begun to acknowledge exists," she adds.