This week, Moody's Investors Service will release the first installment of its new research suite called CDO Navigator, which the agency hopes will add to the market's transparency, something investors are likely to welcome.
In fact, lack of transparency has a been a sore point in the market for years, and often a topic pressed at the several CDO conferences that take place each quarter. Benchmarks for the market can be non-standardized and jumbled, according to investors.
Last year, however, Standard & Poor's launched its monthly Arbitrage Index, which was well received by the market. In it, S&P lists 20-plus data points on each of its two indices: CLOs and CBOs.
Apparently taking a different focus, Fitch gained similar praise for its Web site's surveillance section, in which the rating agency makes available several key data points from a historical perspective on all the CDOs it has rated.
Moody's, which has the largest market share of CDOs, takes these models a few steps further, the agency argues. On a monthly basis, Moody's will update several indices categorized by deal structure-type (currently at five), vintage (1996 to 2001), and deal structure within each vintage. Each index sports an impressive 40 some-odd data points, broken into three categories: ratings distribution, analysis of CDO portfolios, and selected coverage ratios. The portfolio analysis includes several first-time indices, such as % of securities trading at a premium, average market price of portfolio, Moody's Rating Factor, weighted average seasoning and more. Each data point contains a mean value, a max value, a min value, and standard deviation.
In efforts to standardize the benchmarks, Moody's is re-calculating from the raw portfolio data several of the summary numbers reported by the trustees, so that deals can be compared in a true "apples to apples" manner. The rating agency is also displaying what the trustees have reported.
"Over the evolution of the CDO market, we've seen various algorithms used to calculate some of the critical credit metrics, including the Moody's rating factor," said Gus Harris, managing director in the derivatives group at Moody's. The agency has outsourced the data entry function to a team well over 20 people in size, who work full-time entering CDO surveillance reports into the Moody's system. Each report is entered simultaneously by two data entry professionals, so that the results can be cross checked for errors before being loaded into the system. Additionally, Moody's performs error checking on the backend.
At first, the indices will include arbitrage cash-flow CBOs and CLOs, emerging market CDOs, investment-grade arbitrage cash-flow CDOs, and re-securitizations. Down the line, Moody's plans to add several more deal types, such as Euro CDOs, balance-sheet deals, and synthetics.
Next to be released is the one-page Performance Overview Compilation reports, which is a close-up of the deals used in Moody's indices, expected to reach 600, eventually. Other related products will be released later in the year, some only available to parties involved in specific transactions.
"Moody's is providing these services as enhancements to systems and information currently available in the market," Harris said. "We believe that by providing these important metrics, we will be contributing to the transparency of the entire CDO market."
According to a sellside researcher who has given Moody's feedback on the development of the product over the last six months, "It's a little late coming, but it's comprehensive, because they have the largest universe of deals, so that's important."
