The Mechanics of Securitization: A Practical Guide to Structuring and Closing Asset-Backed Security Transactions by Suleman Baig Moorad Choudhry

Author:Suleman Baig, Moorad Choudhry
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-12-25T16:00:00+00:00

Exhibit 3.5 Default vintage curves II

Exhibit 3.4 shows the levels of incremental defaults to be diminishing, and the flattening effect produced by the curves allows us to infer that cumulative defaults tend to peak at around the 10 percent level.

Exhibit 3.5 leads us to a different conclusion. Default levels are following the same broad trends, but are not showing any signs of abating. From this, it is difficult to form a firm view on where defaults will ultimately peak.

For corporate loan portfolios in CLO transactions, vintage default and recovery information will need to be supplemented with internal information on migration history. Rating agencies have published credit curves based on historic observed defaults—giving the probability of default (PD) at each rating level over a number of years. These curves will be calibrated for each portfolio given the information provided.

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