While not carrying the shock value of New Jersey Gov. Jim McGreevey's announcement last week, the fact that some CDOs backed by real estate collateral are pricing sans ratings from Moody's Investors Service has opened up a can of worms about CDO- rating methodologies and how those deals have priced. Now comes talk that Fitch Ratings will announce changes to their ratings metodology next month.

"Since our new criteria was introduced last year, we will be making refinements. We will have modest improvements to our approach, which we expect to bring out in September," said Fitch Managing Director John Schiavetta.

Some focused improvements pertain to CDO squared methodology and the use of Fitch product Vector as a trading tool for synthetically managed CDOs, said Schiavetta. But some of the improvements will affect CDOs backed by real estate collateral, currently a hot topic in the market.

"There's some increased granularity in the treatment of ABS sectors and that would have an impact on CMBS CDOs or any mortgage-related CDOs," Schiavetta explained.

It wasn't clear how deep the changes to Fitch's methodology would go in this area with more details to emerge in September. A spokesman for Standard & Poor's stated the CDO group there had not announced any changes to its methodology pertaining to the CDOs or home-equity ABS.

Pricing wider

Market participants have been buzzing about the lack of a Moody's rating attached to some recently priced CDOs backed by real estate collateral (see ASR 7/19/04). As previously reported, throughout the year, a more conservative ratings methodology on deeply subordinated classes of hyper-tranched transactions rated by Moody's has left the leading rating agency off some recent home-equity ABS. Now home equity-focused CDOs are showing evidence of the same trend.

C-BASS CDO XI, a $500 million CDO backed by RMBS and ABS priced July 29 via joint-lead managers Deutsche Bank Securities and Lehman Brothers, was noticeably absent a Moody's rating, but rather had ratings from both Standard & Poor's and Fitch. The same was true for GMAC Institutional Advisors' a $500 million real estate CDO G-Star 2004-4 and the $300 million Acacia CDO 5 via RBS Greenwich Capital which priced in June.

Reaction from the market, in terms of pricing, has varied. For instance, the triple-A rated senior tranche of Acacia CDO 4, rated by Moody's and S&P but not Fitch, priced at 38 basis points over three-month Libor in April - the same pricing achieved for the triple-A seniors of Acacia 5, pricing in July and which did not contain a Moody's rating.

However, recent research from Lehman Brothers indicates that there has been some reaction to the lack of a Moody's rating in ABS. "The triple-B subordinate sector has tightened by 25 basis points since the beginning of June. However, subordinates not rated by Moody's due to its new and more stressful cashflow analytics criteria have been trading at wider levels. For example, a tripple-B rated (S&P and Fitch) tranche without a Moody's rating generally trades 150 to 200 basis points wider than a Moody's rated Baa2' bond," Lehman's said in its July 26 weekly report.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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