Moody's Investors Service has announced that it would be introducing two supplemental measures to its structured finance ratings aimed at enhancing their transparency and information content.
The first, which is the Assumption Volatility Score, will assess potential rating volatility based on the uncertainty of rating model assumptions, Moody's said. The second, Loss Sensitivity, will be capturing a rating's sensitivity to a shift in the expected loss rate on the collateral pool backing the security.
"These two measures will provide more clarity about the credit characteristics of structured finance ratings," said Michel Madelain, Moody's chief operating officer, in a release from the rating agency. "We believe they will provide investors greater insights into the risks of structured finance products."
Moody's developed the measures working from responses to a call for comment issued last February titled Should Moody's Consider Differentiating Structured Finance and Corporate Ratings? as well as from additional market discussions.The ratings firm received more than 200 responses, including from investors that together held over $9 trillion in fixed-income securities.
Market participants in their responses "overwhelmingly rejected the idea of a separate rating scale for structured finance securities," according to Moody's. But, the players also expressed their desire for more information from the rating agency on key components of structured finance risk. These included the degree of certainty in the assumptions behind a structured finance rating and the sensitivity of a rating to losses in the underlying loan pools, Moody's said.
The rating agency expects to introduce the measures slowly at the end 2Q08, using them first on some new securitizations of vehicle-backed assets. Only new issuance will receive the measures. Moody's also remains receptive to market comments on them.