Originators Credit Quality

The senior tranches of a synthetic CDO, however, may be delinked from the bank s rating by using AAA-rated collateral and default swaps, as described earlier. The final rating is influenced by the credit rating of the default-swap provider and the extent to which the cash flows to investors are exposed to the risk of default by the asset pool. 

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This is notably different from Pfandbriefe where bondholders have an eventual direct recourse to non-eligible assets if cover assets are insufficient to cover their claims and become pari passu with other senior unsecured creditors. Along similar lines, in case of insolvency of an originating credit institution, asset replenishment and/ or substitution is no longer possible, which leaves the SCF fully exposed to asset quality deterioration and repayment, and ensuing cashflow mismatches. 

Because the assets are held within an SPV framework, defined in formal legal terms, the originator s financial status and credit rating are almost irrelevant to the bondholders. There may also be a third-party guarantee of credit quality, which enables the securitized notes to be offered with an investment-grade credit rating up to AAA. FIGURE 14.1 shows a simplified process of securitization. 

Credit wrap. As explained above, the originating bank may buy credit insurance on the debt instruments of the underlying portfolio, to improve its credit quality. 

The sale of assets to the SPV needs to be undertaken so that it is recognized as a true legal transfer. The originator will need to hire legal counsel to advise it in such matters. The credit rating process will consider the character and quality of the assets, and also whether any enhancements have been made to the assets that will raise their credit quality. This can include overcollateralization, which is when the principal value of notes issued is lower than the principal value of assets, and a liquidity facility provided by a bank. 

The CRAs play a key role in the operation of credit markets, and their rating is an indicator of credit quality. However, the ratii is an opinion based on the CRAs methodology. The CRAs usually make it clear that their credit ratii is a measure of credit quality and is not an investment recommendation and does not capture the risk of a decline in market value or liquidity of the product. It remained important for investors and originators to do s nificant amounts of their own independent credit analysis, due diligence, and assess the market risk and liquidity risk associated with an instmment rather, than rely purely on CRAs rating. Unfortunately, many investors did not perform such due diligence. 

The structure of a mortgage master trust is essentially identical to a credit card master trust except that credit card receivables are replaced with mortgage collateral (see Exhibit 11.13). The originator sells an equitable interest in a specified group of mortgages to the master trust. This can then be used as collateral for a number of securitisations. Over time, additional mortgages may be added to the trust, subject to various constraints to protect the quality of the collateral. The same pool of mortgages will support all the series of notes issued by all issuers, with... 

Walter A. Shewhart was a Bell Laboratories scientist and friend and mentor of Deming. Shewhart is credited with having developed a Statistical Process Control Method in the late 1920s. Thus, the origin of the PDCA concept lies in statistical process control, a methodology developed to address the need for improvement in product quality. The emphasis of the PDCA concept with respect to product quality applications is process control and continual improvement. That is also the case in ZIO. The words process and processes and the phrase continual improvement appear in ZIO over 60 times. 

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