AD&Co Unveils Alternative to Credit Ratings

Andrew Davidson & Co., New York, has announced a new service, Breakpoint Analysis, that it describes as a flexible means of assessing the credit risk of mortgage bonds. Using a distance-to-default measure, Breakpoint Analysis "provides what is in essence a dynamic and timely alternative to a credit rating of the asset as an up-to-date measure of credit risk," AD&Co said. The company said a Breakpoint Ratio is the ratio of the collateral losses required to cause the first dollar of a bond's principal writedown to the projected loss in the base-case economic scenario. The ratio adjusts dynamically to changes in home prices, interest rates, home price forecasts, delinquencies, and deal structure, providing a measure that reflects the current distance to default of each bond. "Credit rating agencies provide a valuable service in addressing structural and legal issues in securitization and establishing initial ratings which reflect a broad range of possible economic environments," Andrew Davidson said. "Breakpoint Analysis adds to this by providing an up-to-date, numerical assessment of changes in credit risk due to changing collateral performance and market conditions. This numerical measure can be used to better understand the evolution of credit risk in a portfolio."