Only minute differences separate U.S. structured finance ratings across the credit spectrum, according to Fitch Ratings. The rating agency recently released for the second time a study that compares its own ratings with those of Moody's Investors Service and Standard and Poor's.

Unlike the first analysis, this one surveys a much larger portfolio, Fitch analysts say, providing a broad snapshot of how rating agencies differ when determining risk. Moody's analysts have reacted, saying they are not satisfied with the way Fitch crunched its numbers.

"Basically we found that average rating differences on structured finance securities, both at origination and on seasoned pools, were small - less than a quarter of a notch, and moreover, Fitch's ratings were found on average to land in the middle between the two other rating agencies," said Fitch Managing Director Mariarosa Verde.

A "notch" for the sake of the study meant the difference in a rating that would occur at the so-called sub-rating grade level, for example, from an A+' to an A,' or from a AAA' to AA+.' The rating agency included 34,185 U.S. structured finance bonds totaling $3.2 trillion from its own ratings portfolio.

Fitch found that S&P ratings were higher than Fitch ratings, while Moody's ratings were lower - although this only proved true for securities that received a double rating. For structured finance bonds already in the market, Fitch found that 94.3% and 92.3% that had both S&P and Fitch and Moody's and Fitch ratings, respectively, were either the same as one another or within one notch. The average difference was 0.02 of a notch for the dually rated S&P and Fitch bonds, and negative 0.18 of a notch for the Moody's and Fitch combination, according to Fitch. For those deals issued in 2005, 98.3% of bonds rated by the S&P and Fitch combo had either the same rating or were within one notch, while 96.2% of those rated by both Moody's and Fitch were the same or within one notch. On average, S&P ratings were 0.02 of a notch higher than Fitch's for the vintage, while Moody's ratings were lower by negative 0.20 of a notch.

Portfolio managers should find the study helpful because as they review their own securities portfolios they will be able to put the ratings in context, according to Fitch's Chief Credit Officer Robert Grossman. "They will be able to review how the different ratings agencies compare on a very large sample," he said.

But averaging ratings across the credit spectrum may not display the most accurate results with which to paint a broad picture of trends between the rating agencies, according to Noel Kirnon, a senior managing director in charge of Moody's global credit derivatives business. "If you look at the report, it focuses a lot on the averages, and the averages are somewhat misleading," Kirnon said. Triple-A and double-A plus rated bonds made up a substantial portion of Fitch's sample size, which tend to have a much higher level of ratings similarity among the agencies. Furthermore, the final pages of the report do split out rating differences among the agencies by actual rating level, but only for those deals that received a rating from each of the three rating agencies. Below the triple-A level, "there is a lot more disagreement, there is only agreement 50% to 60% of the time," Kirnon said.

In fact, for triple-rated bonds, Fitch, on average, rated bonds lower than both S&P and Moody's. By and large, Moody's ratings were lower than Fitch ratings from the triple-A level to B minus level. The rating agency's ratings came out below Fitch's ratings 17.33% of the time, and higher than Fitch only 3.56% of the time. Indicating the widest variance, Moody's ratings were the same as Fitch ratings at the B-plus level only 20.51% of the time, and were two notches lower some 56% of the time. Overall, below the triple-A level, roughly 30% of securities rated jointly by Fitch and Moody's carried a higher Fitch rating, Moody's found. Standard and Poor's, on the other hand, rated bonds lower 8.56% of the time than Fitch did, and higher 8.4% of the time, and disagreed the most at the triple-C plus and lower level, where the rating agencies agreed only 14.96% of the time. S&P declined to comment on the results of the study.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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