Fitch Ratings announced on Aug. 2 the launch of Stability Scores for synthetic CDOs. The scores indicate the propensity of a tranche to retain its original rating over a period of one year from closing, thus providing a better understanding of the prospective stability of the ratings.
"Stability Scores will provide investors with additional transparency regarding performance expectations and will enable investors to better distinguish between what are otherwise very similar transactions," said Richard Hrvatin, managing director at Fitch.
The key features to rating stability include the level of excess credit enhancement, underlying diversity, any bar-belling of underlying credit, level of overlap in CDO-squareds and term. For the study, the rating agency simulated the possible rating outcomes at a given point in the future after accounting for expected portfolio performance.
Moreover, the Stability Scores will put the measure of stability into an absolute as well as relative context. The scores range on a scale of ST1 to ST3 and indicate the three levels of one-year theoretical estimates of stability. ST1 is the most stable with a minimum of 90% theoretical estimate of stability while ST2 represents a theoretical estimate of stability between 90% and 80%. ST3 is the least stable with a theoretical estimate of stability of less than 80%.
Richard Gambel, a managing director at Fitch, said, "The product is unique because it is forward looking and takes into account all transaction and portfolio features, not just the level of excess credit enhancement."
For now, Stability Scores and a stability analysis sheet will be generated upon request on triple-A tranches of corporate CDOs. However, Fitch plans to expand the provisions of these scores to lower- rated tranches as well as CDOs that reference ABS in the future.
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