Several significant initiatives have helped to increase transparency in the global structured finance market, making it possible for rating agencies to assign credit ratings to structured finance issues without the cooperation of the relevant issuer or arranger, according to Fitch Ratings.
Unsolicited ratings, Fitch said, were generally difficult to assign in the past due to inadequate transparency levels in the structured finance market. The agency was limited to issuing sector or geographic level commentary on deals or structures for which it had a significantly different credit opinion than that indicated by the publicly available ratings.
Although new regulations will provide even more flexibility, the agency has stated that it does not expect to assign unsolicited ratings on a frequent basis.
The added availability of information could also impact situations where issuers or arrangers request Fitch to remove its existing ratings, the agency said. Historically, such requests have usually been met as publicly available information on structured finance transactions was typically insufficient to maintain the rating. However, under new regulations, such as Security and Exchange Commission (SEC) Rule 17g-5, this may no longer be the case.
Rule 17g-5, which went into effect on June 2, requires arrangers that hire a nationally recognized statistical rating organization (NRSRO) to rate any new structured finance security to provide written representation to the NRSRO being hired.
This therefore compels the arrangers to make available to any NRSRO — whether or not it was hired by the arranger — to provide all information given to the hired NRSRO. This applies to the initial credit rating and for all ongoing surveillance, Fitch explained.
Although non-U.S. issuers selling securities to non-U.S. investors are currently exempt from the rule, the exemption extends for six months only. Additionally, a European Union (EU) version of 17g-5 was proposed by the European Commission on June 2, calling for changes to the existing EU regulation on credit rating agencies. It is included with other amendments that introduce the new EU securities regulator (the European Securities and Markets Authority) as the EU supervisor of credit rating agencies, according to Fitch.
The package of amendments is currently being debated by the EU Parliament. The new rules could be operational in early 2011.
“Fitch's primary role is to service the needs of investors,” said Ian Linnell, global head of Fitch’s structured finance group. “As a result, the agency will typically only assign unsolicited ratings where there is strong investor interest and it has a materially different credit opinion on a transaction compared to those expressed by mandated rating agencies.”
“Where issuers request that Fitch withdraws its ratings from an existing issue in order to be replaced by another agency, Fitch will consider very carefully whether it should keep investors informed of Fitch's view on the transaction by maintaining an unsolicited rating,” Linnell added. “In particular, if the agency believes that the request is due to credit reasons, a practice commonly referred to as 'ratings shopping', then Fitch will aim to maintain the rating. This is clearly in the interests of investors as well as the broader market as a whole.”