Standard and Poor's late last week said it will begin assigning so-called "swap risk ratings" upon request to all rated credit default swaps - primarily those in the global synthetic CDO sector. The move highlights both efforts toward transparency within the credit default swap market, along with a shift to include the structural nuances of unfunded credit default swap transactions within the definition of ratings.

Driven in part by Basel II, the swap risk ratings will be issued publicly and all existing credit default swaps with either confidential credit estimates or assessments will become public upon the counterparty's request. The rating agency has already received "several" requests to provide public swap risk ratings for credit default swaps, it said. Many think Basel II rules could require the swaps to carry a public rating in order to obtain regulatory capital relief.

The swap risk ratings, like the swaps themselves, will be customized from deal to deal. Consequently, they are not intended for use in comparing risk from one swap to another. The ratings differ from those ratings issued for credit-linked notes and other debt instruments because they do not address the creditworthiness of an issuer or issue, but instead address the chance that a swap will be terminated either because of its underlying portfolio, or, if applicable, one of the counterparties, according to S&P.

In order to distinguish the swap risk ratings from traditional debt ratings, each rating will include a suffix indicating which type of risk S&P was commissioned to assess. For example, an AAAsrp' rating would indicate the rating agency assigned a AAA' rating to the swap's reference portfolio. Two other suffixes, srb' and srs' will stand for single counterparty -protection buyer, and single counterparty - protection seller and be used when both the creditworthiness of the reference portfolio and that of either the protection buyer or seller were taken into account.

Hybrid deals that contain both funded and unfunded liabilities could now have an S&P swap risk rating assigned to the unfunded portion and a traditional debt rating assigned to the funded notes.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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