A handful of synthetic collateralized debt obligations structured in Asia have been hit with downgrades in recent weeks due to rating actions on credits found in many of the portfolios. Standard & Poor’s has downgraded 11 synthetic CDO deals, which is about double the amount of rating actions in a typical month, noted Frank Lu, associate in Hong Kong. “There have been credit watches and downgrades in several high-profile names such as Ford, Ford Motor Credit, Tribune and VNU,” said Camille Diafas, ratings analyst in Melbourne. “These are widely-referenced names in many synthetic CDOs in the region,” continued Diafas, noting the 11 were out of 125 rated transactions and only one was downgraded by more than one notch. Following the downgrades, credit houses are paying closer attention to credits on negative watch as well as adding additional subordination for deals. “Nowadays clients are asking for an additional buffer,” said a credit structuring head at a European house. He added for instance investors have been looking for additional 10-20 basis point buffers in tranches to protect against potential downgrades in the coming months.
The majority of transactions in the region are arbitrage-driven synthetic CDOs that are mainly static or lightly managed. “At this stage synthetic CDOs have overall been reasonably stable but if the credit cycle--which has been better than the long-term average--does deteriorate severely, we would expect to see increased rating volatility,” said Vera Chaplin, managing director and team leader of the Pacific structured finance practice at S&P in Melbourne.