Fitch Ratings today published rating criteria for repackaged senior structured finance notes and said that not all resecuritizations are eligible for higher ratings.
Fitch's Structured Finance Obligation Rating considers the relative vulnerability of transactions to a default on principal or interest, as opposed to a transaction's expected loss. Therefore it is possible that although an underlying note is exposed to elevated default risk, the recovery rate will be high in the event of a default.
Institutions that have either ratings-based capital needs or investment guideline limitations above certain rating thresholds may decide to repackage the security into a first loss tranche and a senior tranche.
The likelihood of suffering a loss on the new senior tranche is then significantly reduced because of the additional subordination provided by the junior tranche. This means that Fitch may be able to assign a rating to the new senior tranche that is higher than that assigned to the original security.
When determining whether to assign ratings to repackaged structured finance notes Fitch will take several factors into account, including the seniority of the original note, the capital structure of the new transaction and the expected performance of the underlying assets.
Fitch explained it currently has a moratorium on rating resecuritizations backed by transactions with U.S. RMBS subprime, U.S. Alt-A with overcollateralization structures, or other esoteric assets due to continued performance volatility in these sectors.