Fitch Ratings has updated its criteria for rating emerging market securitizations, focusing on the relevance of sovereign ratings on different transactions.
The rating agency considers the macroeconomic, political, and legal characteristics of emerging market economies when rating ABS. It caps the ratings for emerging market securitizations at a maximum of two to four global scale notches above the relevant sovereign’s country ceiling. The criteria used by Fitch applies globally to all international ratings with emerging markets.
The credit rating agency cited the increased volatility of local economic environments as a source of heightened risk for ABS transactions in emerging markets. This volatility, according to Fitch, can have a significant effect on the probability of default or expected recoveries for an ABS transaction. If the country where the transactions operate is approaching default, the risk will increase substantially. Foreign and local currency ratings of the country and the applicable country ceiling will have a considerable impact on the rating assigned to the securitization in such cases, Fitch said.
The agency has analyzed potential reactions within a given jurisdiction to a financial default by its sovereign. The report details several of the risks that ABS transactions could be exposed to in the event of a sovereign default.
