S&P Revises CDO Rating Methodology
September 18, 2009
Standard & Poor’s has revised its ratings methodology for collateralized debt obligations backed by corporate debt, the rating agency said Thursday. As a result, 4,790 tranches made up of $578 billion of securities may be downgraded.
The revised methodology, which is effective immediately, uses a rating model that illustrates how the debt would perform if the number of corporate defaults increases.
The changes “will provide a more robust analysis than using only simulation models,” analysts at S&P said. The revised methodology will increase transparency and make it easier for investors to understand the ratings and analysis, according to S&P.
To receive a triple-A rating, CDO securities would have to be able to withstand default rates that could occur during “extreme macroeconomic stress, such as the Great Depression,” the analysts said.
The changes will affect CDOs composed of bonds and loans, as well as credit-default swaps. They will affect roughly $319 billion in U.S. CDOs and $250 billion in European CDOs.
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