CDOs Defaults Outperform High Yield Bond: Fitch CDO Default Study.

Business Editors

NEW YORK--(BUSINESS WIRE)--Aug. 9, 2001

In a first ever-published default study on collateralized debt obligations (CDOs), Fitch, the international rating agency, has found that the default rate for CDOs in 1999 and 2000 was 1.83% and 3.87%, as compared to the overall high yield default rate of 4.30% and 5.14% respectively.

`CDO managers substantially outperformed the overall high yield markets in 1999. While closer in 2000, CDO managers still beat the overall mark by a comfortable margin, answering the question `are investors getting their value for their money?'' said Fitch analyst Brian Gordon.

The heart of the study is the empirical data on recovery rates, according to Gordon. There is a belief in the marketplace that defaulted asset prices follow a J-curve pattern. That is the worst price for a defaulted asset is immediately after default, but that holding the assets through a workout process, value can ultimately be maximized. According to the Fitch study, this belief is not supported. In fact, while market participants expect the slope of the price/time curve to be positive, it actually appears to be negative for both loans and bonds.

`Holding onto defaulted assets is actually costing investors money, managers would appear to be best served by selling assets immediately after default, no matter how bad the price appears,' said Gordon.

The preceding comments are from Fitch's report, `An Empirical Study of CDO Asset Defaults and Recoveries', available on FitchResearch, Fitch's subscription-based site located at `www.fitchratings.com'. The study, encapsulating a data set represents 1119 data points covering $3.912 billion in securities, is the first ever study that examines CDO performance separate from the performance of the US high-yield bond market.