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Fitch Ratings-London/New York/Singapore-30 April 2008: Fitch Ratings has today published its revised criteria for rating CDOs exposed to corporate debt. The announcement follows a six-month review of its approach, including an extensive period of two-way consultation and dialogue with market participants. The review included a fundamental re-assessment of Fitch's approach to corporate portfolio risk where each component of the rating approach was challenged and re-tested, leading to a number of important revisions. These revisions are intended to create more stable, predictive ratings, especially for the 'AAA', 'AA' and 'A' categories.
Importantly, additional stresses are applied to capture risks posed by concentrations in sector, industry, or individual obligors.
"CDO modelling to date has relied upon some expected minimum level of diversification. In recent times we have observed an increase in portfolio concentrations, and our updated framework brings this risk into much sharper focus," said John Olert, Managing Director and head of Global Structured Credit at Fitch.
Screening tools are also applied to identify portfolio assets that may have an above-average likelihood of downgrade.
"The early, and sometimes severe, downgrade of corporate CDO notes has been a vexing issue for the market. By identifying adversely selected assets, CDO holders can benefit from additional protection against credit deterioration in the underlying portfolio," said Philip McDuell, Managing Director in London.
Fitch had ceased new rating activity in the sector during the criteria review period, and with the publication of the methodology, lifts this self-imposed embargo.
"To stop rating some types of CDO transactions last year was a necessary step in order to move forward constructively," said Olert. "After intense discussion with the market and months of rigorous analysis internally, the revisions we are implementing are an important step in the restoration of market confidence in CDO ratings."
The new approach will also be used to review existing transactions with exposure to corporate debt and all such transactions remain under analysis whilst the criteria is implemented.
"Applying the updated criteria to existing ratings is important for market transparency and consistency," said Roger Merritt, Fitch's Chief Credit Officer for Global Structured Credit. While Fitch expects many ratings to be affirmed, downgrades are also expected, in some cases by several rating notches.
"We expect the downgrades to be most severe in those transactions with portfolio concentrations, or those with little or no cushion in their current level of credit support," said Merritt. "The extent of manager flexibility and other relevant qualitative considerations are also expected to be factors in the rating review. If a manager shows willingness and ability to mitigate portfolio risk, we will take this into account."
Fitch plans an extensive communications plan in the coming weeks, covering details of the criteria, as well as plans regarding its application to current ratings.
"We have been extremely pleased with the quantity and quality of feedback received during the consultation period. We listened carefully, adjusted our views where we thought necessary and look forward to continued dialogue with investors and managers now that we have completed the review of our approach," said Olert.
A full description of Fitch's rating criteria for corporate CDOs can be found in the following reports, both of which are available on the Fitch Ratings web site at 'www.fitchratings.com'.
-- 'Global Rating Criteria for Corporate CDOs';
-- 'Global Criteria for Cash Flow Analysis in Corporate CDOs'.
The Fitch Portfolio Credit Model, which incorporates Fitch's Global Corporate CDO Rating Criteria, is available at 'www.fitchratings.com' under the headings: Products & Services >> Tools & Models >> Structured Credit
Next week, Fitch will hold webcasts and conferences covering not only the new criteria but also to discuss responses to market feedback, a sample of model-only output on typical transaction types and an outline of Fitch's intentions to apply the new criteria to existing ratings. Following these events, the impact samples will be published in a separate document.
Contact: John Olert, New York, Tel: +1-212-908-0663; Roger Merritt, +1-212-908-0636; Philip McDuell, London, +44 (0)20 7417 3485; Ken Gill, +44 (0)20 7417 6272; Rachel Hardee, Hong Kong, +852 2263 9918.
Media Relations: Julian Dennison, London, Tel: +44 20 7862 4080; Sandro Scenga, New York, Tel: +1 212-908-0278; Shivani Sundralingam, Singapore, Tel: + 65 6796 7215.
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.
