Fitch Ratings announced today that it was consolidating its synthetic CDO criteria into one document,  helping to clarify its position regarding synthetically referenced ABS. The clarification applies to both credit events and the valuation process, as well further defining restructuring as a credit event for high-yield corporate debt.

Under its consolidated criteria, Fitch will divide the risks of funded synthetic CDOs under three categories: the risk of losses exceeding the tranche attachment point; the instrument experiencing losses on the charged assets; and losses from the default of the credit-default swap counterparty credit event for high-yield corporates. The agency also outlines the impact of correlation on portfolio defaults and credit issues particular to managed CDOs.

"ABS are increasingly being referenced synthetically in CDOs because of the difficulty in sourcing the cash assets, while high-yield corporates are frequently introduced to boost yield," said Managing Director Kenneth Gill, in the European structured finance group. "Both of these products bring unique risks that have to be analyzed accurately."

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