Fitch Discusses Growth & Potential Risks for U.S. Synthetic CDOs of CMBS.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 -- Along with the continued growth of credit derivatives and synthetic CDOs, U.S. transactions that reference only CMBS CMBS See: Commercial Mortgage Backed Securities assets are likely to continue for the foreseeable future. In a new report, 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. points out that investors should attain a better understanding of the unique issues and potential underlying risks involved with this burgeoning synthetic asset class. Standardization of credit derivative documentation has helped facilitate the growth of these types of CDOs, which is a stark contrast to 2003 and 2004, when only small percentages of CMBS were included in synthetic 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 reference portfolios. Continued development of synthetic CDOs of CMBS, however, does not mean such CDOs will be immune to various potential risks, according to Fitch Managing Director Richard Hrvatin. 'In addition to the obvious risk of credit events on the underlying CMBS , there are additional risks that are unique to the synthetic nature of these transactions, such as a default of a swap counterparty or charged asset' said Hrvatin. 'CMBS investors should be aware that unless a third party guarantees against the risk of default of the charged assets, a default of this kind may lead to early termination, which could lead to losses for the investor due to changes in the market value of those assets,' said Hrvatin. 'Therefore, note proceeds should be invested in highly rated charged assets.' Another risk investors should be aware of is associated with the default of the protection buyer, or credit default swap Credit Default Swap A swap designed to transfer the credit exposure of fixed income products between parties. Notes: The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. counterparty. 'If the protection buyer's rating falls below the minimum rating requirement, the swap counterparty must either replace itself with a suitable swap counterparty, seek a guarantor, or post collateral to cover potential loss upon its default, or the notes may be downgraded,' said Hrvatin. 'Synthetic Overview for CMBS Investors' is available on the Fitch Ratings web site at www.fitchratings.com. Fitch's rating definitions and the terms of use Terms of Use are rules set up by the owner of an intellectual property or service to govern how they may be legally used. In many cases, terms of service are used as a contractual agreement between a company and users of a service they provide. of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures Policies and Procedures are a set of documents that describe an organization's policies for operation and the procedures necessary to fulfill the policies. They are often initiated because of some external requirement, such as environmental compliance or other governmental are also available from the 'Code of Conduct' section of this site. |
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