Fitch IBCA and Duff & Phelps Credit Rating Co. are putting the final touches to the ratings reconciliation process that will precede their June merger. The agencies, which will merge under the name Fitch, were scheduled to make public their common ratings for outstanding structured transactions on June 1, after previously announcing changes to some long-term sovereign ratings.
Over 90% of the ratings for securitization worldwide are expected to be affirmed. "For example, out of the 150 Latin America securitizations rated by Duff & Phelps and Fitch we probably differ in one or two transactions and the difference doesn't amount to more than one or two notches," explained Jill Zelter, head of structured finance at Fitch. "Generally speaking, our criteria are not that different so the reconciliation of criteria for future flow deals, which constitute 99% of the outstanding ratings in Latin America, has been pretty simple."
Yet sources argue that the "rating harmonization" process is not as smooth as it might seem. "There are some meaningful differences between the agencies and some of Duff's ratings are lower that Fitch's," said a source from a rating agency. "There are some pretty heated debates going on. This is a really hot potato."
Many believe that Fitch's ratings will prevail over DCR's. One such case might be Banco Hipotecario Nacional's fourth mortgage securitization. The deal featured a political insurance policy from Zurich American Insurance Co. and was the subject of some controversy among rating agencies. BHN received an A1 rating from Moody's Investors Service and an equally high A-plus rating from Fitch, while DCR and Standard & Poor's argued that the deal should not go above the sovereign ceiling (ASRI 9/20/99 p.1)
There are also rumors of a debate regarding the ratings for the oil-backed securitizations from Petroleos de Venezuela (PDVSA) and Petroleos Mexicanos (Pemex). DCR has an A-minus rating for PDVSA and a triple-B-plus rating for Pemex, while Fitch gave both deals an A rating. "Given the political and economic instability of Venezuela, raising the rating for PDVSA could be quite risky," said a securitization specialist.
Fitch ratings are guided by the "going concern assessment" for the company while DCR uses the local currency rating of the company to determine its ratings.
Fitch's assessment centers on the performance of a company's commercial obligations. "We make the distinction of looking at the commercial capacity of the company which is the going concern assessment because in a future flow you are relying on the company to perform something," explained Zelter. "By that we mean that an oil producer is expected to produce oil for an oil-backed future flow or that a bank that issues a check securitization continues to perform as a financial entity and to cash checks."
In contrast, DCR's rating rationale is based on the company's financial obligations, which are measured by its ability to pay its local currency debt.
"Though the definitions differ, Duff's and Fitch's philosophy is very similar," said Zelter. "So we just agreed that it makes sense to rate future flow transactions based on Fitch's going concern assessment."
Others disagree. "The main reason why the main criteria from now on is going to be Fitch's criteria is that they are the acquiring company. It comes down to that," said another pro.
Some investors did not seemed concerned with the upcoming changes. "I expect a smooth transition and no reaction from the market," said Donna Ennis, an investor with Mutual of Omaha.
However, sources argued that a possible upgrade of some transactions in the emerging markets could backfire. "There is a very big risk in upgrading local transactions in nascent markets," said a source. "Securitizations are still a novelty and an overblown rating that ends in a default could scare investors away and close the market."