Fitch Ratings released proposed indicators and ratings that it believes should add value to existing structured finance ratings.
In its most recent release, Fitch focused on the separate complementary indicators that can be offered to enhance the meaning and usefulness of already existing structured finance ratings.
The new indicators and scales are meant to enhance ratings in three key areas: loss given default/loss severity, collateral quality assessment, and rating transition probability and volatility.
In the area of losses, the report proposes a complementary loss severity rating scale at the security level to accompany traditional ratings. Fitch's ratings traditionally address the probability that a security will default prior to its legal final maturity, but they do not address the extent of loss that might occur if a security defaults.
Fitch believes that additional disclosure in this area would offer the most value given the inherent difference in the loss given default of traditional corporate debt compared with most structured finance debt.
In terms of collateral quality assessment, Fitch suggested that an opinion scale be adopted for individual asset classes and sub-sectors.
At the time of rating a new transaction, the agency would assign the underlying collateral an opinion grade along with the rating of the securities backing the deal.
As part of the rating process, the rating agency usually conducts a periodic originator review visit to assess the underlying assets' origination quality and underwriting processes. The result of this analysis is considered by the rating committee when determining transaction ratings. However, typically no separate opinion on collateral quality is published.
For rating transition probability and volatility, Fitch recently committed to an extension of "rating outlooks" to all structured finance areas globally. These outlooks are aimed at giving forward looking opinion about the medium-term prospective direction of a tranche rating, generally over the next 12 - 24 months. Fitch believes this will give the market greater information about potential future individual tranche performance than an explicit rating volatility indicator.
The rating agency said it is hard to develop meaningful scales that give indications of the potential for a particular security to suffer rating transition or volatility This would require isolating factors captured by traditional debt ratings.
However, the additional transparency regarding the probable medium-term path of a credit rating would be useful information for investors to have, Fitch said.
The rating agency is asking for feedback on the proposals from market participants over the next month.
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