Moody's reports CDO upgrades are up and strong tranches get stronger

By Michelle Anderson

Rochester, N.H., March 8 - Moody's Investors Service announced the results of two reports on Thursday that found not only that the percentage of CDO upgrades increased 39% in 2006 but that strongly rated tranches tended to improve as they amortize.

In the first report, "Credit Migration of CDO Notes, 1996 - 2006 for U.S. and European Transactions," Moody's said that upgrades of 2006 U.S. and European CDOs increased by 39% while downgrades increased by 27%, according to a press release.

Additionally, the downgrade rate of resecuritization CDOs declined to 2.8% in 2006 from 6.9% in 2005 and 11.7% in 2004. Most of the downgraded tranches saw their ratings move three or fewer subcategories, which is another improvement, according to the report.

Although some early vintage resecuritization CDOs were more volatile in the past, those asset-backed security sectors have since stabilized, according to Danielle Nazarian, senior vice president of Moody's and author of the report.

Arbitrage cash flow CBOs had a downgrade rate of 7%, arbitrage cash flow CLOs had a downgrade rate of 0.6% and dollar-denominated synthetic arbitrage CDOs had a 5% downgrade rate.

Although CDOs with high concentrations of RMBS and home equity have been highly stable to date, the outlook is unclear, depending on the effects of recent stress in the sub-prime market.

Similarly, CDOs with strong overcollateralized tranches will see those tranches continue to improve while weaker tranches deteriorate during amortization, according to another Moody's report titled "U.S. CDOs: Influences on expected loss as tranches approach maturity."

"Even if the portfolio assets do not experience any rating migration, the credit profile of the rated liabilities is still dynamic over time," said Moody's senior credit officer and report author John Park.

Moody's found that a CLO waterfall payment structure usually strengthened the credit quality of tranches with overcollateralization of greater than 100% of the outstanding debt and weakened tranches with less than 100%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.