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The Journal of Structured Finance

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The Analysis of Short-Term Rating Migration in Synthetic CDOs

Richard Hrvatin, Matthias Neugebauer and Gareth Stoyle
The Journal of Structured Finance Fall 2006, 12 (3) 20-27; DOI: https://doi.org/10.3905/jsf.2006.661442
Richard Hrvatin
Managing director of Fitch Ratings in New York, NY.
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  • For correspondence: richard.hrvatin@fitchratings.com
Matthias Neugebauer
Director of Fitch Ratings in London, U.K. matthias.
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  • For correspondence: neugebauer@fitchratings.com
Gareth Stoyle
An analyst at Fitch Ratings in London, U.K.
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  • For correspondence: gareth.stoyle@fitchratings.com
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Abstract

The credit rating on a tranche of a synthetic CDO transaction addresses the probability that losses in the reference portfolio will not exceed that tranche's available credit enhancement (the attachment point) over the life of a transaction. This article introduces a model that allows comparison of near-term rating stability of different CDO tranches with the same initial rating. The question of whether the original rating will be maintained on a transaction over time will be determined by the pull of two factors: adverse rating migration in the reference portfolio exerts a negative influence on a CDO rating while, absent such migration, the passage of time exerts a positive influence. Other factors that influence ratings stability are surplus enhancement, the granularity of the portfolio (number of reference entities), bar-belling (range of ratings within the tranche), the weighted-average rating of the portfolio, and overlap of reference credits between tranches.

TOPICS: CLOs, CDOs, and other structured credit, statistical methods

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The Journal of Structured Finance
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The Analysis of Short-Term Rating Migration in Synthetic CDOs
Richard Hrvatin, Matthias Neugebauer, Gareth Stoyle
The Journal of Structured Finance Oct 2006, 12 (3) 20-27; DOI: 10.3905/jsf.2006.661442

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The Analysis of Short-Term Rating Migration in Synthetic CDOs
Richard Hrvatin, Matthias Neugebauer, Gareth Stoyle
The Journal of Structured Finance Oct 2006, 12 (3) 20-27; DOI: 10.3905/jsf.2006.661442
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