Fitch Ratings announced that  it  is  to  assign Loss Severity (LS) ratings to structured finance  deals. 

This is the  latest  in a series of steps by the rating agency to enhance the quality and transparency of its credit ratings, LS  ratings  are  made to complement traditional debt ratings, giving an indication of the relative degree of risk that a security might suffer a high loss severity in the event that the security defaults.

"Since  Fitch  first proposed a Loss Severity rating scale in July 2008, we have received numerous comments indicating that this scale would give users  of  structured  finance  ratings  the  most  valuable  additional analytical  insight,"  said  Stuart  Jennings,  structured  finance risk officer  for  the EMEA region at Fitch Ratings. "The aim of the scale is to  complement  the  existing  long-term  credit  ratings for structured finance securities which exclusively address the probability of default of a security, the so-called 'first dollar of loss.'"

"LS  Ratings  represent  a  distinct structured finance rating scale and help  differentiate  such securities from other debt securities, such as corporate  bonds,"  said Glenn Costello, structured finance risk officer for  the  Americas at Fitch. "This is an issue that has been highlighted in recent months, particularly by the regulatory community."

The rating agency already  has  a  separate Recovery Rating scale. Recovery Ratings  (RR)  are assigned to securities that are seen as distressed (rated 'C'  to 'CCC'), where there is a real prospect of default. In terms of being a relative measure,  the  LS rating varies from the RR scale. RRs provide an ordinal opinion that is  based  on  absolute  recoveries  or  loss severity, instead of  relative  recoveries  or  loss  severity as would be indicated by the LS rating.

In the release, Fitch said that it recognizes  that  the provision of two scales, one relative and the other absolute, that addresses recovery given default might serve to confuse users. For  this  reason,  LS ratings will only be assigned to securities that are  not seen as distressed. This implies that only securities that rated  in  the  'AAA' to 'B' categories will be assigned a LS rating.

In  the event that a security becomes distressed and the long-term rating is lowered  to the 'CCC' to 'C' level, then the LS rating will be withdrawn and a RR rating will be assigned.

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