Moody's Investors Service will begin issuing more detailed performance reports for European static synthetic CDOs. The rating agency announced late last week that it would begin providing "an absolute measurement of the credit strength of each individual tranche over time." The new product is called Moody's Metric (MM), which is a performance indicator derived from the rating agency's long-term rating scale.
Because the expected loss of a given tranche varies depending on its age, the MM was created to apply an ordinal, continuous rating scale - where a single number corresponds to the expected loss boundary for a given rating category - despite the age of the tranche. A Aaa' rating corresponds with a 1; a Aa1' with a 2; a Aa2' with a 3, etc. The system obviously cannot be used in the managed synthetic CDO universe because trades can impact both the average life and expected loss of a given tranche.
"So far, the MM is nothing more than a modest translation of Moody's ratings," the rating agency wrote in a report regarding the metric. "But the value of the MM is clearer when we consider that the MM may be continuous." The new value also provides more granularity than a rating. For example, a 2.00 MM would correspond to a Aa1' expected loss, whereas a MM 2.01 would rank slightly above the Aa1' expected loss hurdle, the rating agency explained. Going forward, the current MM value will be reported monthly for the 74 European static synthetic CDOs the rating agency compiles performance overviews for, while new transactions will be added at the time of rating.
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