Dominion Bond Rating Service just released the final beta version of an advanced modeling tool designed to evaluate the future performance of synthetic CDO structures. DBRS unveiled the tool at IMN's ABS East conference the preceding week in Boca Raton, Fla. A final version has yet to be publicly released.

The tool, called "CDO Toolbox," has been tested in its beta version for the past four months, said Jireh Wong, a senior vice president at DBRS.

"Amongst the beta testers, the results have been very positive. They find that it really allows them to see where the sensitivities are in the portfolio when you stress the parameters over time," Wong said. The model is unique because of its ability to stress test for future scenarios. For example, one could use the model to test a scenario two years into a deal's life in order to see what the result would be, Wong said.

Thus far the tool can be used on standard CDOs, CDO^2, and other CDO structures, and DBRS is currently working to incorporate the recently popular leveraged super-senior trade into the model's analytics. The toolbox was programmed in C++ with a [Microsoft Excel] and Visual Basic interface, and its ability to incorporate various future scenarios stems from its so-called open architecture - the ability for users to change nearly all variables driving the enhancement numbers, according to DBRS. For example, users of the model can specify default curves, correlations between and within industries, and group credits into industries, recovery values, short or long positions and subordinated credits, among other options.

But most importantly, and what DBRS says distinguishes this model from other publicly available models, is the user's ability to sensitivity test for "what if" scenarios on various trades. Those include the migration and/or default of any reference obligations, industries or credits in a particular rating category - at any point in time. For example, a user could segment negative credit migration on housing-related corporate reference entities included in a synthetic deal two years out in order to see how the trade would perform.

"This is an extremely important feature that has been missing from many of the models otherwise publicly available," DBRS wrote about the model. "By performing this type of analysis, and particularly with CDO squared transactions, investors will begin to understand the risks that they are taking and the true credit sensitivity of transactions they are evaluating."

Wong said the reaction among market participants at the conference was significant. "We actually had quite a large contingent of people there. There was a lot of buzz around it," Wong said.

Many market participants will be looking for updated models that incorporate the LSS trade, as it is considered the most popular at the moment, as those hurt by the corporate credit downgrades of Ford Motor Co. and General Motors Corp. lick their wounds from losses taken, according to conference participants. The unwinding resulting from the downgrades caused significant cheapening in senior and equity tranches, compared to mezzanine, resulting in a difficult environment for arbitrage gains using the CDO squared trade.

(c) 2005 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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