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Is Asia Ready For Managed Synthetic CDOs?
Fitch Ratings (May 3, 2006)

Fitch Ratings-Hong Kong/Singapore - 03 May 2006: Fitch Ratings today said that the Asian market is seeing a growing shift towards managed synthetic collateralised debt obligations ("CDOs") similar to the trend seen in other structured credit markets. This is being driven by an investor base that is increasingly aware of the impact of credit events - most notably Delphi and, to a lesser extent, Dana. To date, the overwhelming majority of synthetic CDOs in Asia have been static.

"Asian originated synthetic CDOs contain a majority of non-Asian credits, and investors have become increasingly aware of the challenges that monitoring these largely North American credits pose," says Rachel Hardee, head of structured credit for Asia Pacific. Fitch has witnessed a surge of interest in "lightly managed" and "actively managed" synthetic transactions. In a recent study of the Delphi credit event, Fitch highlighted that on average, managed synthetic CDOs did better than static CDOs in terms of avoiding credit loss. Accordingly, some investors now require CDOs that have the ability to trade out of credit-impaired assets whilst others require CDOs with a greater degree of trading flexibility, not confined to "credit impaired" trades. "Investors are seeking a manager that can take on this role and, in particular, manage out of credit-impaired assets," added Ms. Hardee.

However, Fitch highlights that the Asian market does not yet have the depth of experienced asset managers that characterise both the North American and European markets. Those that belong to a global asset manager platform with a depth of resources on which to draw are very few in number. Moreover, very few Asian CDO asset managers have a track record in managing the synthetic product. The performance of a managed synthetic CDO is affected by the experience and expertise of the manager.

Furthermore, Asian synthetic CDOs are often created on a bespoke basis for a single investor - they are very small deals by international standards and therefore typically more sensitive to costs than a larger, syndicated transaction. Even if suitably experienced international style managers are identified and available, they may prove cost prohibitive. Therefore the challenge in satisfying this increasing demand in Asia is finding appropriate parties to take on this role. This may present an opportunity for more international asset managers, familiar with the underlying assets and experienced with synthetic CDOs, to expand into the Asian market should this level of demand continue.

Fitch's criteria reports "Managed Synthetic CDOs' and "Reviewing and Rating CDO Asset Managers" are available on www.fitchratings.com.

Contact: Rachel Hardee, Hong Kong, +852 2263 9918/ rachel.hardee@fitchratings.com; Charles Chang, Hong Kong, +852 2263 9919/ charles.chang@fitchratings.com

Media Relations: Ching-Yuen Lock, Singapore, Tel: +65 6238 7301.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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