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- 5/17/06
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I was in a conversation with coworkers about rating on CDO.
Assume it is Dynamic Asset Pool CDO (non-mortgage based).
(of cuz different CDOs will have different rating factors, let's say it is like CLO, or Credit Card master Trust) One of the rating factors is based on the credit facility pool or based on actual drawn facility pool?
Credit facility is like the credit line, how much each borrowing entity can borrow.
(i.e. in the pool, 10% of total credit line are assigned to BB rated companies to borrow, 35% of the total credit line are assigned to AA rated companies to borrow, etc.)
Drawn facility is the actual money each entity borrows.
(i.e. in the pool, 30% of the money are drawn (borrowed) by CCC rated companies, 35% of the money are borrowed by BB rated companies, etc.) This is the actual exposure.
The amount of the pools are the same, cuz they are the same pool in a sense.
Or another example will be credit cards
If a product's asset is $1 bil on credit card. The asset pool maybe:
A. X credit card accounts with a total credit line = $1 bil
B. X credit card users/account with a total outstanding balance = $ 1 bil.
Remember it is a dynamic pool.
I think it should be rated on condition B not condition A.
My question is which one is currently being rated by agencies, (of cuz there are many other factors will be considered by the agencies when they rate the product)?
I was debating with some coworkers that there is no much thing that you can rate the credit line side. (maybe there is 1 bil credit line, but no one ever borrows a single dollar). I think currently the agencies must be rating the actual drawn pool, since it is the actual money being borrowed and generating interest of pay the investors. But I don't have anything to support my belief.
What do you guys think?
Thanks.
Assume it is Dynamic Asset Pool CDO (non-mortgage based).
(of cuz different CDOs will have different rating factors, let's say it is like CLO, or Credit Card master Trust) One of the rating factors is based on the credit facility pool or based on actual drawn facility pool?
Credit facility is like the credit line, how much each borrowing entity can borrow.
(i.e. in the pool, 10% of total credit line are assigned to BB rated companies to borrow, 35% of the total credit line are assigned to AA rated companies to borrow, etc.)
Drawn facility is the actual money each entity borrows.
(i.e. in the pool, 30% of the money are drawn (borrowed) by CCC rated companies, 35% of the money are borrowed by BB rated companies, etc.) This is the actual exposure.
The amount of the pools are the same, cuz they are the same pool in a sense.
Or another example will be credit cards
If a product's asset is $1 bil on credit card. The asset pool maybe:
A. X credit card accounts with a total credit line = $1 bil
B. X credit card users/account with a total outstanding balance = $ 1 bil.
Remember it is a dynamic pool.
I think it should be rated on condition B not condition A.
My question is which one is currently being rated by agencies, (of cuz there are many other factors will be considered by the agencies when they rate the product)?
I was debating with some coworkers that there is no much thing that you can rate the credit line side. (maybe there is 1 bil credit line, but no one ever borrows a single dollar). I think currently the agencies must be rating the actual drawn pool, since it is the actual money being borrowed and generating interest of pay the investors. But I don't have anything to support my belief.
What do you guys think?
Thanks.
