In a just-released report, Fitch Ratings said that one-in-three rating proposals for new structured finance transactions need considerable changes before these offerings can be rated.
According to a release from the agency, since launching its Transaction Filtering Committees (TFCs) in 2009, it has gotten 849 preliminary SF rating proposals. The agency said that 31.5% of these preliminary deals had substantial credit or structural issues that had to be addressed before the rating process can start. Additionally, the rating agency has also rejected nearly one in 10 proposals outright, after designating them as unrateable.
"Transaction Filtering Committees have helped strengthen the rating process and improved the quality of the structured finance transactions that Fitch ultimately assigns ratings to, which can only serve to benefit investors," said Ian Linnell, global head of structured finance and covered bonds for Fitch.
The rating agency offered a detailed analysis of its filtering committee results. In total, Fitch has classified 8.7% of deals as 'Red' or unrateable. It has also designated the 31.5% of deals previously mentioned as 'Amber'. This means that the deal requires specific issues to be addressed if the rating process is to continue.
According to Fitch, these figures are actually conservative as they exclude deals that were declined by the agency at a very early stage because of specific credit or criteria issues.
The results are broken down by group — RMBS, ABS, CMBS, and structured credit. They are also divided by region — North America, EMEA, Latin America, and APAC. Fitch also discusses the rejection rates by group and looks at the quarterly rejection rates.
Irrespective of the outcome of a TFC, Fitch will not automatically rate the deal. For instance, issues raised for 'Amber' transactions may prove ultimately insoluble. In fact, only a quarter of such transactions were ultimately assigned a rating. Even for 'Green' transactions, only 57% were eventually assigned a rating often due to new issues emerging that were not highlighted during Fitch's TFC.
"The Transaction Filtering Committee process provides early and definitive feedback to transaction parties while helping to enhance the global consistency of Fitch's analytical decision making," said Stuart Jennings, group credit officer for global structured finance for Fitch.
TFCs comprise senior credit members from at least two ratings teams and at least one independent credit officer. The TFC chairperson must be a managing director from a different rating group from that which received the proposal.