Fitch Ratings last week introduced what it is calling a first-of-its-kind synthetic CDO risk modeling tool. The program - called RAP CD - is the result of a year's worth of work by a London-based team of analysts led by Group Managing Director Kimberly Slawek. It is said to be unique because it allows investors a better means at which to anticipate and manage portfolio volatility. So far, the product only works for CDOs that use corporate credit default swaps, although the ability to assess risk with asset-backed derivatives is on the way, according to the rating agency.

The release comes on the heels of several similarly aimed tools for detecting future behavior within the booming - and often opaque - synthetic CDO market. Fellow rating agency Standard & Poor's on June 26 released its CDO Evaluator Version 3.2, the newest version of its CDO modeling tool. Dominion Bond Rating Service last September released the beta version of its own synthetic CDO modeling program, called "CDO Toolbox."

Fitch's Web-based program works like this: CDO deal structure and market data are plugged into the system, which, in turn, applies model pricing, stress testing and sensitivity analysis in order to determine mark-to-model sensitivity and market risk. Users receive a report detailing such key tranche and reference entity sensitivities; correlation; CDS delta hedge equivalents; theta analysis; portfolio and rating downgrade sensitivities; jump-to-default; so-called time-decay and recovery rate sensitivities. "There really is nothing comparable in the market," said John Schiavetta, a managing director at Fitch. "There are CDO models out there. There is CDS pricing data out there. There are ways to get base correlations - but what we do is pull it all together for the investor, give them the ability to access their specific portfolios and tranches with complete model and input transparency," he said.

For example, an investor could analyze such scenarios as how a one basis point movement in interest rates affects his or her bonds, to how a one basis point change in credit spreads on any underlying name affect a particular tranche value, Schiavetta said. Additionally, one could ask, "What is the net effect of my tranche value if there is a systematic widening?"

Fitch built its model using models from both Algorithmics and Reoch Credit. RAP CD uses CDS and index pricing data from Valuspread and GFI, although the rating agency said it will incorporate additional pricing data in the coming months.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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