Confusion surrounded the recent - and what some sources coined abrupt - modifications to existing French risk weightings (see ASR 5/27/02). Two weeks since the changes were implemented it appears that the main incentive is to prevent banks from structuring deals and retaining the mezzanine piece that can unexpectedly fall to the triple-C/single-D rating tier.

According to Dresdner Kleinwort Wasserstein, this may have been the case in several highly leveraged CDOs that were priced by French banks. A bank usually sells all rated tranches and keeps the equity piece to cap its loss. If it retains the mezzanine piece then the additional capital requirement will be 8%. For those tranches affected, the losses they would have incurred could in some cases be in excess of 8%.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.