Fitch Ratings said today that it has made changes to its global rating methodology for CDOs backed by trust preferred securities (TruPS).

These revisions will likely result in one-to-two notch downgrades for most U.S. bank TruPS CDOs, according to the rating agency.

The criteria changes will conversely have little rating impact on TruPS CDOs that have no exposure to U.S. bank collateral.

The most integral rating factors that the rating agency cited in its TruPS CDO surveillance criteria are the current payment status of collateral as well as
the credit quality of performing collateral held by the CDO.

Among the more notable criteria revisions are tiered loss expectations for now deferring bank securities. Loss estimates for those securities range from 100% for ‘AAAsf’ rated tranches to 50% for 'Bsf' rated tranches, Fitch said.

Majority of the rating actions that have resulted from the implementation of Fitch’s new rating methodology will likely be contained in the senior and middle tranches of the CDO debt structure, Fitch said. Analysts added thhat the ‘AAsf’ through ‘Bsf’ rated tranches will probably experience most of the downgrades.

Rating actions are often predicated on changes to the payment status of
collateral, Senior Director Derek Miller said. "Defaults and deferrals have been gradually rising over the last several months, most notably among bank TruPS CDOs," Miller said.

Added trend information is available in Fitch’s monthly Bank TruPS CDO
Delinquency and Default Index


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