Relatively high numbers of corporate defaults were the main cause of rating volatility in synthetic CDO transactions over the past 18 months, according to a report by Standard & Poor’s. The study found that high-profile defaulting entities such as Enron Corp., Railtrack PLC, Worldcom Inc., and British Energy PLC were included in the portfolios of many synthetic CDO transactions and contributed to the increase in the number of rating actions taken since the beginning of 2002. Of all note classes issued in synthetic CDO transactions, 15 per cent had been downgraded at least once by the end of March 2003. Of these downgraded classes, 38 per cent are so-called fallen angels, having made the transition to non-investment grade from investment grade rating categories. However, the report noted that perception of the performance of CDO transactions may be worse than actual performance. ‘These CDO rating transitions should be viewed in the context of the overall market,’ said Andrew South, a credit analyst at Standard & Poor’s in London. ‘While suffering more severe rating downgrades than the rest of the ABS market, the performance of CDOs has nonetheless been broadly in line with that of corporates.’ In all, only 39 transactions out of a total of 257 have experienced rating actions, and only four classes of notes from four different transactions have actually defaulted.
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