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| Structured Finance CDOs and Event of Default Risk by Elizabeth R. Nugent of Fitch Ratings December 3, 2007 Summary: With the unprecedented negative performance in the U.S. subprime RMBS market and the resulting record downgrades of subprime RMBS bonds, structured finance (SF) CDO portfolios have seen significant rating migration. For transactions that include rating-based haircuts for overcollateralization (OC) calculations, the negative rating migration has had serious effects on OC test performance, often resulting in the diversion of interest and principal from more junior notes in the priority of payments to redeem senior debt obligations in an attempt to bring the tests back in line. More serious problems are brewing in the form of an increased risk of technical defaults for transactions that include minimum OC calculations in their events of default (EOD) language. It is this increased risk of technical default that Fitch addresses in this special report. Download paper (74K PDF) 5 pages
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