Fitch Ratings released revised criteria for rating market value structures (MVS) after a review that the rating agency first announced in December 2007. The review was a response to unforeseen stresses on current market value instruments.
Among changes to the ratings include a cap of triple-B for knock out MVS. In these transactions, unwind triggers are set significantly away from current market levels, but upon breach, unlike traditional MVS, the rated notes would be under collateralized and recoveries in the event of unwind would likely be minimal to none, Fitch said. These transactions include CPDOs, SIV capital notes, leveraged super-senior notes, and total rate of return CLOs.
MVS backed by less liquid asset types will, for the most part, be ineligible to be rated above single-A. MVS with illiquid assets will most likely be ineligible for investment-grade ratings and may not even be rated.
Traditional MVS, where the unwind mechanism protects losses on rated notes, may be rated as high as triple-A, subject to additional stresses, Fitch said. These transactions include market value CDOs, market value commercial paper, senior obligations of SIVs, closed-end fund debt, and collateralized fund obligations.
Limited weight, if any, will be given to partial liquidity mechanisms unless such a mechanism provides clear structural benefits, Fitch said.
Fitch is also re-emphasizing the importance of transparency from managers in their ongoing reporting.