Moody's Investors Service has developed a framework for rating collateralized debt obligations backed by restructured debt. With collateral spreads in most spread markets at or close to historical tights and with CDOs still offering liquidity discounts, there has been an increase in the attractiveness of structuring these types of CDOs, according to Rodrigo Araya, v.p., senior credit officer. "By doing a repack, you can improve the credit quality and have an asset that looks much better," he explains, adding it is coming out a revised way to evaluate these deals now because it expects more managers to try and structure them. And, because liabilities backed by restructured bonds can be sold, for example, as interest- or principal-only securities, the rating agency made the change in its analysis. It is not a wholesale new methodology, but rather is a revision of the rating agency's existing framework for rating CDOs that is modified to account for some of the IO and PO possibilities that could be part of a CDO backed by restructured deals, he says. Earlier this year, ZAIS Group closed ZING VI--the first CDO to have the potential to hold 100% of its assets in restructured outstanding deals. Despite the attractiveness of assets relative to other spread products, Araya cautions that structuring a CDO backed by a repackaging can be tricky. "You have to have the expertise to identify the good opportunities and create value out of something that you believe is a good asset. It's not that I'm going to start doing it," he quips.
Moody's Develops Framework For Emerging CDO Class