Imagine the embarrassment of a synthetic CDO manager when, forced to purchase the par amount of a referenced asset gone bad, also has to suck up nearly the entire amount of the deal's excess credit enhancement in order to fund the purchase, consequently causing a rash of downgrades.

While that scenario is not likely due to upfront contract modifications made on such deals, as more and more synthetic ABS transactions come to the market utilizing the International Swaps & Derivatives Association's relatively new pay-as-you-go (PAUG) template, along with variations of it, investors will now need to pay close attention to the nuances within contracts, according to a recent report by Fitch Ratings.

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