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NEW YORK (Standard & Poor's) Oct. 17, 2006--Standard & Poor's Ratings Services
today announced the conclusion of the comment period and the commencement of
the transition period for use of its new global CDO cash flow modeling
assumptions. Standard & Poor's would like to thank market participants for
their responses.
Key dates in the process for updating the criteria are:
-- Request For Comment released June 19, 2006;
-- Comment period closed July 7, 2006;
-- Transition period now in effect through Dec. 31, 2006; and
-- Effective date Jan. 1, 2007: Standard & Poor's CDO Evaluator Version 3.2
(E3.2) applies globally for new transactions closing on or after Jan. 1, 2007.
Standard & Poor's is making several analytical enhancements, most notably
refinements to its break-even default rate and corporate recovery rate
methodologies. These enhancements supplement portions of Standard & Poor's
base case cash flow modeling analytics for rating cash flow CDOs and synthetic
CDOs using excess spread for subordination.
The refinements contain the following key elements, among others:
-- Break-even default rate (BDR) determination. BDRs will be determined using
a percentile approach.
-- Recoveries. Corporate collateral: The loan and bond ranges are revised and
now "tiered" by CDO liability rating. Optional asset-specific corporate
recovery assumptions are provided (Standard & Poor's recovery ratings).
-- Net weighted-average coupon cap (net WAC cap, also known as available funds
cap (AFC) stress). Stresses are revised to reflect certain features of
pay-as-you-go CDSs (PAUG CDS) and the expectation of higher AFC levels for
loans backing RMBS/HELs issued in the recent rising U.S. interest rate
environment.
-- Hybrid CDO-related biases. New default and amortization biases are
introduced for modeling hybrid trades using a guaranteed investment contract
(GIC) or a reserve account.
"We are introducing criteria enhancements to capture transaction performance
across a wider range of market behaviors, to offer more flexibility to the
market, and to reflect CDO product evolution/innovation," said Standard &
Poor's credit analyst David Tesher, managing director and head of cash flow
CDOs in the global CDO group. "First, we are now applying percentile
break-even default rates, which are in effect confidence levels instead of
absolute minimums or outliers. We consider that this approach still
differentiates sensitivities to various economic stresses by rating category,
while recognizing performance under a range of scenarios."
Mr. Tesher continued: "Second, we are now offering the market a choice of
recovery methodologies, giving them more flexibility in structuring/managing
transactions. Finally, we are providing the market with the expanded
capability to model new product innovations, such as hybrid CDOs."
Standard & Poor's formally published its criteria refinements today in two
separate articles. The new global cash flow modeling assumptions will be
applied in conjunction with E3.2 to rate all cash and hybrid transactions
closing from Jan. 1, 2007 onward. Before that launch date, Standard & Poor's
will continue to make the new assumptions available for use and assist market
participants in migrating their current platforms to the new assumptions and
criteria. This transition period should enable the global market to uniformly
implement the changes in transactions across the U.S., Europe, and
Asia-Pacific markets.
The articles are titled, "CDO Spotlight: Update To General Cash Flow Analytics
Criteria For CDO Securitizations" and "CDO Spotlight: Using Standard & Poor's
Recovery Ratings In Cash Flow CDOs". Both were published on Oct. 17, 2006, on
RatingsDirect, the real-time Web-based source for Standard & Poor's credit
ratings, research, and risk analysis, at www.ratingsdirect.com. The articles
can also be found on Standard & Poor's Web site at www.standardandpoors.com.
Select Credit Ratings. Then under Criteria & Definitions, locate the articles
under Ratings Criteria.
The refinements as originally released for comment can also be accessed in the
article "Request For Comment: Refinement Of Global CDO Cash Flow Modeling
Assumptions," published on June 19, 2006, on RatingsDirect and Standard &
Poor's Web site, following the same path stated above. The proposal is also
available on Standard & Poor's CDO Interface at www.cdointerface.com. If you
are not a RatingsDirect subscriber, you may purchase a copy of this report by
calling (1) 212-438-9823 or sending an e-mail to
research_request@standardandpoors.com. Members of the media may request a copy
of this report by contacting Adam M Tempkin in the U.S. on (1) 212-438-7530 or
adam_tempkin@standardandpoors.com, or Felicity Albert in Europe on (44)
20-7176-3501 or felicity_albert@standardandpoors.com.
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