Since adjusting its excess spread assumptions earlier this year, several RMBS-backed CDOs have priced sans a rating from Moody's Investors Service. While in some cases market sources noted the lack of a Moody's rating created an arbitrage opportunity, other market sources speculated that Moody's inability to rate those deals was another unintended consequence of its enhancement adjustment.

The Moody's CDO group released a special report last week putting to rest the perception that Moody's was unable to rate certain CDOs due to non-Moody's rated assets being included in those CDOs.

"I think investors have been told that we were unable to rate the [CDO] transactions because a lot of the underlying collateral was not rated by Moody's, when, in fact, that's not the case," said Moody's Group Managing Director Noel Kirnon. "We can obviously rate those deals, it's simply that our opinion on the underlying collateral would have been different and so our opinion on the CDO would have been different too," Kirnon added.

In short, following adjustments to its excess spread assumptions, Moody's requires additional enhancement for RMBS sub-pieces, therefore, CDOs backed by said collateral - unless they incorporate the additional, Moody's-mandated, credit enhancement - would receive a lower rating from Moody's than from its competitors. The lack of a Moody's rating on the underlying collateral was not the reason these CDOs were executed without a Moody's opinion.

"The need for additional credit enhancement is a direct result of the fact that non-Moody's rated ABS CDOs generally consisted of relatively large baskets of [non-Moody's rated collateral] - generally 30% to 50% of the deals' portfolios - and Moody's ratings on the [non-Moody's rated collateral] would have, in general, been lower than the ones assigned by other rating agencies," the special report read.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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