In response to issues raised in last week's ASR article "The notching game: Market speaks out against Moody's CDO policies for CMBS," (see ASR 6/18/01, p.1) Moody's Investors Service issued a report late last week clarifying and outlining the exact analytical reasons for the severity of its notching practices, including numerous credit issues related to collateral-level CMBS analysis that have caused significant differences of opinion between the rating agencies.

Moody's insists that its long-standing notching policies are designed to protect senior CDO investors by helping to assure the analytical consistency of the rating inputs to a particular CDO. Most significantly, unlike other agencies, Moody's takes the leveraging of loss into account when rating CMBS, meaning that it takes into consideration the fact that even one or a few loans defaulting in a deal could cause a tranche to default with 100% severity.

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