| | Considerations for Rating Commodities-Linked Credit Obligations ("CCOs") by Lars Jebjerg of Derivative Fitch (London),
Gareth Stoyle of Derivative Fitch (London),
Olivier Vincens of Derivative Fitch (London),
David Austerweil of Fitch Ratings (New York),
Yintian Wang of Fitch Ratings (New York),
Ben Zhang of Fitch Ratings (New York), and
Rachel Hardee of Derivative Fitch (Hong Kong) November 14, 2006 Abstract: As the structured credit market continues to develop, new types of assets are being referenced in synthetic collateralised debt obligation ("CDO") structures. The CCO is one such structure that has recently met with significant interest in the market. - The emergence of CCOs, combining payoffs linked to commodity assets with the structural features of synthetic CDO structures, is a definite trend.
- Fitch's quantitative analysis is based on Monte Carlo simulation of the CCO structure. The agency has found that asymmetric GARCH processes with jumps are able to fit empirically observed features of commodity returns well. Principal components analysis is used to model the correlation structure of the reference portfolio.
- Fitch can rate CCOs containing both put/call and long/short positions (see below for definitions of these terms).
- Fitch is able to analyse combined CCO/CDO structures based on a combination of the CCO analysis framework and the Fitch Default VECTOR Model ("VECTOR"), with the correlation between commodities and credit assets modelled through an extension to the VECTOR factor model.
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