Fitch Ratings has released an update to its criteria on existing asset securitization in emerging markets. The rating agency detailed the impact and potential risk of a sovereign default on transactions within these countries.
This replaces and supersedes the previous report called Criteria for Existing Asset Securitization in Emerging Markets: Sovereign Constraints that was issued June 21. The rating agency noted that while the analytical approach remains unchanged from its previous methodology, the new update contains specific clarifications and refinements.
Fitch believes that sovereign ratings are an important aspect in the analysis of an existing asset securitization, particularly the macroeconomic, political, and legal factors that are unique to each emerging country.
The rating agency analysts said that volatility, which often occurs in emerging markets because of the local economic environment, plays a sizeable role in determining the probability or default or expected recoveries of an ABS transaction. It is exacerbated when the country itself is in the process of or close to defaulting, according to the report.
As a result, Fitch considers sovereign ratings, both foreign and local currency as well as the Country Ceiling of the country where the securitization is occurring to be very influential in the ratings process of the securitization itself.
The report said that the ratings of emerging market securitizations could be rated above that of the sovereign Issuer Default Rating (IDR) or Country Ceiling of the respective nation if the securitization is capable of withstanding the economic stress that would result from a sovereign default.
However, the rating agency stated that the amount at which an emerging market structured finance deal can be rated above its respective sovereign’s Country Ceiling is capped between two to four global scale notches.