Fitch Introduces New Tool to Quantify CDO Losses
As banks struggle with how to value their impaired stuctured finance assets, Fitch Ratings has introduced a new asset-level projected loss analysis (PLA) to quantify loss expectations on Collateralized Debt Obligations CDOs).
Fitch said the new analysis builds off its Residential Mortgage-backed Securities (RMBS) mortgage loss assumptions to estimate the impact to SF CDOs. Fitch’s PLA analysis complements its criteria used for the review of existing SF CDO transactions with portfolio concentrations of subprime and Alt-A RMBS issued between 2005 and 2007.
Fitch initially developed the SF CDO PLA to identify tranches that were at risk for downgrades based on loss expectations for the underlying RMBS assets. This analysis shows how much mortgage distress any one SF CDO tranche can sustain before experiencing losses. The criteria report presents these RMBS loss estimates by RMBS issuance year, as well as sensitivity of RMBS loss estimates to underlying mortgage loss assumptions.
Fitch’s PLA has proven very effective in identifying SF CDOs in which the potential for losses to a particular CDO tranche many not be captured by traditional CDO analysis.
Fitch has applied the PLA criteria in screening Fitch-rated SF CDOs to identify tranches to be placed on Rating Watch Negative where asset credit migration had not materialized at that point in time. The continued RMBS downgrade activity experienced this year corroborated the insights from this analysis. The PLA also allowed Fitch to generate stressed CDO loss estimates for SF CDOs not rated by Fitch, but held by Fitch rated entities. This analysis has been used in analyzing CDO squared transactions, financial guarantors, financial institutions, and credit derivative product companies (CDPCs) that have exposure to SF CDOs.
Fitch’s ‘Projected Loss Analysis Criteria for Existing Structured Finance CDOs‘ is available for purchase.
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