Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
13Activity
0 of .
Results for:
No results containing your search query
P. 1
CDO Ratings Criteria

CDO Ratings Criteria

Ratings: (0)|Views: 262|Likes:
Published by api-3848669
CDO rating
CDO rating

More info:

Published by: api-3848669 on Oct 18, 2008
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

03/18/2014

pdf

text

original

Publication Date: March 21, 2002
Global Cash Flow and Synthetic CDO
Criteria
Introduction

Since their rebirth in the mid 1990s, collateralized debt obligations (CDOs) have enjoyed remarkable
growth on a global level and have truly become a key component of the structured finance market. CDOs
are structured, leveraged transactions, which were initially backed by high-yield corporate bonds and
loans but now include many different asset types. They offer debt investors that hold rated tranches an
opportunity to invest in different levels of risk and return. They also offer the potential of high returns to the
equity investors willing to take on the first loss position should some of the assets default.

During the last five years, as the market became more familiar with the CDO structures and risks, the
transactions evolved to include different types of collateral including emerging market debt, project finance
loans, and investment-grade corporate debt. The transaction structures have expanded from the basic
cash flow structures that passed through principal and interest payments generated by the assets, to
market value structures that look at the market value of the collateral to payback investors, to the synthetic
structures that pass on to investors only the credit risk of the underlying assets.

In 1999 and early 2000, the structures expanded with the emergence of the first structures to repackage
CMBS, ABS, and CDOs as assets in new CDOs. Also, the structures evolved to include and repackage
assets that do not have set payment terms, such as distressed debt CDOs, CDOs of private equity funds,
and CDOs of hedge funds. These structures appeal to different investors, collateral managers, and
sponsors for a variety of reasons, including participating in new asset types, capitalizing on market
dislocations (arbitrage), or to transfer credit risk.

Standard & Poor's has been rating CDOs since their inception in the late 1980s and has participated in all
segments of the CDO market on a global scale. The goal is to provide investors with a clear, transparent,
and appropriate methodology for looking at these transactions, and for assessing the risk associated with
each instrument. As with all criteria in a rapidly changing market environment, CDO criteria evolved to
keep pace with the markets. The global rating methodology and criteria used in rating cash flow and
synthetic CDOs are presented in this publication. While the methodology for analyzing different CDO
transactions can be presented in fairly detailed terms, Standard & Poor's recognizes that each transaction
is different and has individual considerations that must be taken into account. As a result, Standard &
Poor's works closely with the sponsor on every transaction and customizes its analyses based on the
requirements of each transaction.

Standard & Poor's is constantly reviewing and fine-tuning its criteria in order to best address the
embedded risks associated with each transaction structure, legal jurisdiction, and asset type. Standard &
Poor's is committed to serving the CDO community globally, and has the appropriate resources to rate
CDOs throughout the world. We invite readers, sponsors, and arrangers to review this publication and
provide us with any comments, suggestions, or data that might help us improve our analyses and
methodology.

The criteria book is divided into a number of chapters as follows:
Table of Contents
1. The CDO Product...................................................................................................... 4

a. Overview................................................................................................................................................. 4 b. Collateral and Deal Types.................................................................................................................... 5 c. CDO Structure....................................................................................................................................... 6 d. Market Dynamics................................................................................................................................. 12 e. Comparison of CDOs with Traditional ABS...................................................................................... 12

2. Standard & Poor's CDO Rating Process................................................................ 13

a. Procedures.......................................................................................................................................... 13 b. Structural Basics and Legal Structure.............................................................................................. 14 c. Sizing Default Frequency................................................................................................................... 15 d. Review of the Collateral Manager..................................................................................................... 15 e. Sizing Loss Severity........................................................................................................................... 16 f. Collateral and Structural Elements.................................................................................................... 16 g. Establishing the Required Level of Credit Support........................................................................ 16 h. The Rating Committee and Final Rating.......................................................................................... 17

3.CDO Transaction Structural Basics........................................................................ 18

a. Cash Flow CDO Collateral Debt Securities/Eligibility Criteria........................................................ 18 b. Synthetic CDO Collateral Debt Securities/Eligibility Criteria.......................................................... 21 c. Ramp-Up Period.................................................................................................................................. 24

4. CDO Evaluator and Portfolio Benchmarks............................................................ 40

a. Standard & Poor's CDO Evaluator.................................................................................................... 40 b. Monte Carlo Simulation...................................................................................................................... 43 c. Portfolio Inputs.................................................................................................................................... 44 d. Modeling Correlation.......................................................................................................................... 48 e. CDO Monitor........................................................................................................................................ 49 f. Portfolio Benchmarks.......................................................................................................................... 51 g. Mathematical Descriptions................................................................................................................. 53

5. CDO Manager Quality: A Critical Consideration................................................... 54

a. Comprehensive CDO Manager Analysis.......................................................................................... 55 b. CDO Team Focus............................................................................................................................... 55 c. CDO Performance Focus................................................................................................................... 57 d. Systems and Operations Evaluations.............................................................................................. 59 e. Why Standard & Poor's CDO Manager Focus?............................................................................... 60

6. CDO Recovery Levels and Timing......................................................................... 60

a. Corporate Assets in Cash Flow CDOs............................................................................................. 60 b. Recoveries on Synthetic CDOs........................................................................................................ 63 c. ABS Recoveries in CDOs.................................................................................................................. 65

7. CDO Structural and Collateral Considerations..................................................... 67

a. Credit Support and Payment Structures.......................................................................................... 67 b. Mismatch in Payment Frequencies.................................................................................................. 71 c. Interest Rate Hedging........................................................................................................................ 72 d. Foreign-Exchange Hedging.............................................................................................................. 73 e. Synthetic Securities in Cash Flow CDOs......................................................................................... 74

8. Cash Flow Analytics............................................................................................... 75
9. Hedging Consideration.......................................................................................... 85

a. Interest Rate and Basis Risk Swaps................................................................................................ 85 b. Foreign Currency Swaps.................................................................................................................. 86 c. Swap Agreement Criteria for CDOs................................................................................................. 86

10. Legal Considerations for CDO Transactions..................................................... 89 11. CDO Surveillance................................................................................................. 93 12. Special Topics...................................................................................................... 96

a. Master Trust Structures.................................................................................................................... 96 b. CDOs of Structured Finance Securities........................................................................................ 106 c. Project Finance CDOs..................................................................................................................... 111 d. Distressed Debt CDOs.................................................................................................................... 122 e. Emerging Markets/Multi-Jurisdiction CDOs.................................................................................. 130 f. Rating Municipal Collateralized Debt Obligations......................................................................... 135 g. Bank Tier 1 and Trust Preferred CDOs.......................................................................................... 139 h. CDO Combination Securities.......................................................................................................... 141 i. Sizing Default Risk............................................................................................................................ 143 j. Mapping Internal Scores to Standard & Poor's Ratings

. .

Appendix A: Mapping Bank Loan Scoring Models................................................ 148 Appendix B: Structured Finance Interest Rate and Currency Swap Criteria...... 150 Appendix C: 'AAAt' Swaps Approved in Structured Finance Transactions........ 152 Appendix D: Swap Agreement Criteria for CBO/CLO Transactions..................... 154 Appendix E: Interest Rate Assumptions for Structured Ratings.......................... 162

Activity (13)

You've already reviewed this. Edit your review.
1 thousand reads
1 hundred reads
Raghu Nayak liked this
Raghu Nayak liked this
helen3000 liked this
prince185 liked this
porcupine2 liked this
nemesis17117 liked this
adrhm liked this
tyrest29748 liked this

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->