S&P introduces new CDO benchmarking tool

Rating agency Standard & Poor’s (S&P) has introduced a new tool for rating the performance of synthetic collateralised debt obligations (CDOs). Synthetic rated overcollateralisation (SROC) is a measure designed to let investors quantify the chance of a CDO tranche facing a rating migration.

SROC is defined as the percentage of defaults in the collateral that the tranche must withstand to maintain its rating. As a simple percentage, it allows for easy comparison between two CDO tranches, said S&P. When SROC is 100%, there is exactly sufficient credit enhancement to maintain a rating on a tranche.

S&P added that if SROC falls below 100%, scenarios are run that project the current portfolio, assuming no asset rating migration, 90 days ahead. If the projection indicates that the SROC should return to a level above 100% at any time, the rating is maintained but placed on 'creditwatch' with negative implications. If, however, the projection indicates that the SROC will remain below 100%, then the rating is lowered.

S&P intends to make the SROC available to the market through a new monthly publication called the Synthetic ROC Report.

"The report will enable market participants to track the performance of individual transactions and use cross-transactional comparable metrics as investment tools in the embryonic secondary market," said S&P.

Simon Collingridge, head of European surveillance at S&P, said he hoped the new benchmark would help the market better manage its credit risk by reducing ratings volatility in the short-term.