Weighted Average Rating Factor (WARF)

What Is Weighted Average Rating Factor (WARF)

The weighted average rating factor (WARF) is a measure that is utilized by credit rating companies to show the credit quality of a portfolio. This measure aggregates the credit ratings of the portfolio's holdings into a single rating. WARFs are most frequently calculated for collateralized debt obligations (CDOs).

Understanding the Weighted Average Rating Factor (WARF)

To compute the weighted average rating factor on a CDO, the rating agencies must initially decide a credit rating for each instrument fundamental the CDO. In the Fitch Ratings scientific classification, for instance, this rating can go from very high credit quality (AAA) to bad quality (CCC) to default (D). This letter rating compares to a mathematical rating factor, which thusly relate to the 10-year likelihood of default. The not entirely settled by working out the weighted average of these mathematical factors. To ascertain the weighted average, the notional balance of the asset is increased by the rating factor and afterward these values are summed. This sum is then partitioned by the total notional balance of the portfolio.