Fitch Ratings said today that enhancements it continues to make to its rating criteria for structured finance and covered bonds will have less of an effect on ratings for existing and new transactions.
The rating agency plans to review its methodologies annually at a minimum, as per its code of conduct and according to European regulation requiring the annual review of structured finance and covered bonds ratings.
However, the rating agency said these updates are becoming quite minor given the scope of changes and their impact on ratings of existing transactions.
"Criteria review is a vital part of our rating process, but criteria review does not necessarily imply criteria change," said Marjan van der Weijden, head of EMEA structured finance for Fitch. "In fact, Fitch is striving for a somewhat inverse, more-is-less approach with criteria changes, with the impact on ratings to lessen as criteria updates become more frequent."
Some examples of these rating criteria changes include the enhancement to Fitch's counterparty criteria for structured finance deals. The rating agency said that the changes indicated no rating impact.
Additionally, Fitch’s EMEA residential mortgage loss criteria addendum that focused on the Netherlands showed that the impact was generally positive for the more senior classes, but mildly negative for the junior classes.
Over the course of the coming weeks, Fitch said it will publish its updated criteria for European CMBS and its revised criteria for rating transactions of Dutch Nationale Hypotheek Guarantie (NHG)-insured mortgages.
"Since the downturn, the scope of CMBS rating analysis has expanded as additional sources of market, operational, legal and idiosyncratic risk have been observed," the report said. "Consequently, Fitch has taken significant negative rating action in this sector in recent years."
The rating firm added that its new criteria report reflects these developments more formally. the report outlines the principles according to which core rating assumptions are periodically determined in a counter-cyclical manner. As these broad changes are already part of the rating analysis, the publication is not expected to result in rating changes to existing offerings, Fitch said.
With respect to the Dutch NHG criteria, Fitch currently has tranches from 15 programs on Rating Watch Negative after Fitch published its exposure draft in March 2010. The criteria addressednumerous concerns that Fitch raised last year, specifically compliance risk, the consideration of the seller’s commitment to repurchase non-compliant loans and treatment of the amortizing insurance coverage.
Publication of the final criteria was delayed to allow time to reflect possible enhancements to the NHG scheme that were under discussion. The proposed enhancements did not ultimately take place. The final criteria's publication will most probably result in the rating agency downgrading a number of transactions unless the affected deals are restructured.
