According to Fitch Ratings, 32 corporate synthetic CDO tranches will default following the recent ISDA ruling which called a credit event on Ambac Assurance Corporation.
This level of defaults would represent 10% of Fitch's global synthetic CDO tranches.
"Ambac Assurance is a widely referenced name, present in 58% of the 169 global Fitch-rated synthetic CDO transactions," said Jeffery Cromartie, senior director and head of EMEA structured credit surveillance at Fitch. "Therefore, Fitch expects to see negative rating pressure as well as principal impairments on exposed tranches rated 'CCC' and below."
However Cromartie said that the impairment of synthetic CDO tranches rated 'CCC' and below should not come as a surprise in the current economic climate. Fitch has been expecting impairment in this sector, and the agency's ratings as well as the EMEA sector-wide outlook reports have reflected this view for the last three quarters - specifically in the 'Areas to Watch' section of the sector outlook reports.
Any impairment is likely to result in a significant loss to a tranche. For example, relative to their respective reference portfolios many tranches are less than 1% thick (from attachment point to detachment point). As the initial credit enhancement is largely exhausted, any further portfolio losses are likely to completely impair an affected tranche. If a tranche is written down or experiences a payment default, Fitch will downgrade the tranche to 'D'.
No investment grade tranches are facing impairment. Due to a recent wave of pre-payments or bilateral exchanges the number of investment grade tranches outstanding has declined. Currently, less than 5% of the 339 remaining global CDO tranches rated by Fitch are investment grade.