Moody’s Investors Service has adapted its synthetic collateralized debt obligation model CDOROM for internal evaluation of credit derivative product companies. It will also apply the model, in conjunction with a waterfall model, to managed cash and other transactions, said Yvonne Fu, team managing director.
The increased number of CDPCs helped initiate the move (SN, 4/17, 5/8), which gives the agency a deeper understanding of the companies’ risk, Fu said. The agency adapted the CDO model by adding parameters relevant to CDPCs, such as the expected loss on a counterparty level and the loss tolerance ratio. Moody’s, however, will continue to rely on the capital models used by the CDPCs, which assess how much capital is required to maintain triple-A counterparty ratings in various scenarios.
Moody’s is also looking to use CDOROM with CDOEdge, its waterfall model, to take a closer look at managed cash and other transactions. The combination would give a more detailed view of the actual portfolio’s performance, which could allow portfolio managers to fine-tune the leverage in their portfolios. Currently, most managed cash deals are managed to covenants such as the rating factor and asset correlation, Fu noted.