Fitch: Pro Rata Pay Structure May Add Risk For U.S. Middle Market CDOs.NEW YORK New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share. In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. pay structures have emerged recently in U.S. middle market collateralized debt obligations Collateralized Debt Obligation (CDO) A general inclusive term which covers Collateralized Bond Obligations, Collateralized Loan Obligations, and Collateralized Mortgage Obligations, as a vehicle to strengthen investor appeal in the mezzanine tranches of a CDO (Collaborative Data Objects) A programming interface from Microsoft for accessing MAPI-based e-mail, calendaring and scheduling servers. Originally called "OLE Messaging" and "Active Messaging," CDO wraps the Enhanced MAPI library into a COM object that provides the while highlighting the triggers that protect its most senior classes. However, there is some risk with the rewards of pro rata pay structures that necessitates added analysis to better understand the CDO at every layer in the capital structure, according to Fitch Ratings Fitch Ratings An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. . In an effort to mitigate the potential risk involved, investors should focus on structural tests, such as overcollateralization, interest coverage and other cash flow diversion features that facilitate the structure in switching to sequential pay from pro rata pay. Used extensively in ABS CDOs in the past, pro rata pay structures enable each tranche of a CDO to receive a percentage of distributable interest or principal amount regardless of class seniority. If there is a coverage test breach, however, the structure reverts back to sequential pay, which protects the most senior bondholders. In its analysis, Fitch pays particular attention to how collateral performance triggers are set to the worst case scenario
Worst Case Scenario is a reality show aired on TBS in 2002 in the U.S.. . Clear positives for a CDO include triggers that can protect senior noteholders while allowing for some asset migration to other lower-rated tranches, and governing legal documents that clearly stipulate defined parameters that facilitate changes in the waterfall from pro rata to sequential pay. 'Structural Features in Pro Rata Pay CDO Transactions' is available on the Fitch Ratings web site at 'www.fitchratings.com'. |
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