Fitch Ratings presents its asset-level projected loss analysis (PLA) to quantify loss expectations on structured finance (SF) CDOs.

In a release, the rating agency said that this new analysis builds off its RMBS mortgage loss assumptions to estimate the impact to SF CDOs. The rating agency's PLA analysis complements its criteria used for the review of existing SF CDO deals with subprime and Alt-A RMBS portfolio concentrations issued between 2005 and 2007.

The rating agency initially developed the SF CDO PLA to identify tranches that were at risk for downgrades based on loss expectations for the underlying RMBS assets. This analysis shows how much mortgage distress any one SF CDO tranche can sustain before experiencing losses, said Managing Director Kevin Kendra.

The new criteria report  presents these RMBS loss estimates by RMBS issuance year, as well as sensitivity of RMBS loss estimates to underlying mortgage loss assumptions.

"Bridging the gap between residential mortgage delinquencies, foreclosures and losses to the structured finance CDO tranches held by banks, insurance companies and other investors has proven to be a challenge for many in the marketplace,"  Kendra said. "This analysis demonstrates the variation of CDO loss expectations to changes in mortgage loss assumptions."

The rating agency has applied the PLA criteria in screening Fitch-rated SF CDOs to identify tranches to be placed on Rating Watch Negative where asset credit migration had not materialized at that point in time. The continued RMBS downgrade activity experienced this year corroborated the insights from this analysis.

The PLA also allowed the rating agency to generate stressed CDO loss estimates for SF CDOs that it did not rate, but held by Fitch rated entities. This analysis has been used in analyzing CDO squared deals, financial guarantors, financial institutions, and credit derivative product companies (CDPCs) that have exposure to SF CDOs.

Fitch utilizes its PLA as an additive overlay to its review criteria for CDOs with exposure to RMBS assets published in November 2007. Fitch is revising its criteria for rating new structured finance CDOs with an exposure draft expected to be published in the coming weeks.

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