Fitch Ratings published its surveillance criteria for rating CDOs exposed to corporate debt.

The  revised approach considers a number of important factors. Among which is that highly rated tranches be resistant to excessive rating  volatility  throughout  normal  credit cycles, while lower rated tranches might show a more significant level of volatility over the same cycles. 

Fitch said that fundamental to this new approach is that the highly rated tranches' credit enhancement anticipates some level of portfolio deterioration over a base case before a rating action is required.

While the new approach is a lot similar to the agency's methodology for determining ratings for  new  issues, its revised surveillance criteria contain some notable differences.  The surveillance  methodology primarily considers  that  class  ratings  are  able to tolerate explicit levels of   portfolio migration  throughout  the deal's life. 

Furthermore, Fitch’s criteria for new ratings considers analytical  adjustments  for  certain portfolio factors, including obligor concentration  and  adverse  selection,  which  might result in higher loss expectations when the ratings are first assigned. These adjustments are not necessarily applied over the monitoring process.

‘Accounting  for  future portfolio declines in our loss rates for higher rated  tranches  should  better  protect  against a downward spiral that other  methodologies  may  not capture,’ said John Olert, group managing director and head of global structured credit for Fitch.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.