Credit Ratings of Collateralized Debt Obligations in Microfinance

This thesis focuses on the mechanics of microfinance collateralized debt obligations (MiCDOs) and outlines crucial risk factors for international investors and microfinance institutions (MFIs), in contrast to already established collateralized debt obligations (CDO) and their rating systems. Due to the lack of reliable data on the collateral pools, investors are commonly hindered in performing extensive valuations and risk analysis by themselves. Hence, many investors treat structured finance products like traditional assets and rely solely on credit ratings. However, the use of the same rating scale for different investment vehicles hides the significantly different risk profile for the same rating tiers.Understanding the consistency of credit ratings for MiCDOs therefore requires substantial knowledge of the underlying asset class, general credit rating principles and the idiosyncratic aspects of MiCDOs.Even though the validity of modern credit ratings depends on the quality and quantity of the supplied data from the issuers, the majority of MFIs lack in professionalism to provide those data. This leads to exclusion from capital markets overall. However, the transfer of trust onto credit rating agencies (CRAs) can only be reasonable, if investors understand, how CRAs assess the risk factors and if the framework is sufficient for the particular asset class. Even though, the big players have stated that their ratings are consistent through all asset classes, research has shown that this is not fully true