S&P:US Activity Reviving for Single-Name CDS, CLN.

Business Editors

NEW YORK--(BUSINESS WIRE)--July 31, 2003

The downturn in activity that Standard & Poor's Ratings Services has witnessed in the single-name credit-default swaps (CDS) and credit-linked notes (CLN) market in the U.S. is beginning to show signs of reversal. Credit analysts in Standard & Poor's Structured Finance Ratings group determined that part of the decline could be attributed to the uncertainty that FIN 46 cast on the CDO market. A slowdown in CDO issuance has a direct effect on the number of synthetic credit estimates that Standard & Poor's issues to CDO collateral managers.

Standard & Poor's reviews CDS either to assign a rating to a CLN, or for a credit estimate, which is an abbreviated review of a CDS being purchased by a CDO vehicle. In the first half of 2003, the percentage of credit estimates provided by Standard & Poor's were just 16% of total synthetic transactions. That compares with the first half of 2002 when credit estimates made up 54.48% of activity. "Activity began picking up at the end of the second quarter," said credit analyst Mary Ryan, a director in Standard & Poor's Structured Finance Ratings group in New York. "Based on what we are hearing from the market, a number of transactions are expected through the end of 2003. By year-end, CLN and CDS should be a greater percentage of our business."

In addition, ISDA recently updated its 1999 ISDA Credit Derivative Definitions, which are intended to streamline documentation for credit derivatives. "Since it is still a growing market," Ms. Ryan explained, "standardizing the documentation process can only help to make it more transparent and easier to transact in the marketplace." (Total notional outstanding volume, according to the British Bankers Association, is at $2.15 trillion, up from $1.97 trillion in 2002.)

Standard & Poor's Structured Finance Synthetics group also reviews various forms of securities repackaging, or repacks, as they are often called. The most basic form of repack is geared to retail investors. This structure typically involves the placement of rated corporate bonds into a trust and the issuance of rated certificates in $25 minimum denominations. There may be a slight modification of the stated coupon. The new certificate rating is generally dependent on the rating of the corporate bonds held by the trust. In some instances, a repack will also include an interest rate or currency swap and therefore introduces the swap counterparty as another rating dependency.

"The majority of the repack business we have seen thus far in 2003 has been from existing programs," explained credit analyst Srabani Chandra-Lal, an associate director in Standard & Poor's Structured Finance Ratings group in New York. "But a number of bankers have contacted us about introducing new programs into the market." One of the newer uses of these repack programs involves the repackaging of CDO assets.

The market for synthetic securities is very much investor-driven. Customized securities are often created to suit the specific needs of individual investors. Bankers use a variety of tools to craft these instruments including puts, calls, interest rates, currency and CDS. Standard & Poor's expects this market will continue to innovate in response to the ever-changing needs of investors.

Copyright (c) 2003, Standard & Poor's Ratings Services