It appears that rating agencies have listened and learned from investor gripes about the ratings process's opacity.

Two weeks ago, Fitch Ratings unveiled a new methodology for rating corporate CDOs. Last week, Moody's Investors Service followed suit by enhancing its approach to rating structured finance transactions.

Moody's released two new additions to its structured finance ratings as part of an effort that began in February. The shift is aimed at increasing ratings transparency and bringing investor confidence back to the ratings process. Although investors appreciated Moody's gesture, they expect the impact to be minimal.

Among the rating agency's changes to its structured finance ratings is the addition of an assumption volatility score, or V score. This measure will determine the potential rating volatility for a transaction. The V score will use a 1-through-5 scale to rank transactions by their potential to experience significant changes in volatility, 1 being low volatility and 5 being high.

The score will focus on factors such as historical performance, data adequacy, the complexity and market value sensitivity of a transaction, and governance. A single V score will be used across all tranches of a transaction.

Moody's will also include a loss sensitivity rating in its new analysis, which will address rating sensitivity to a change in the expected loss rate for a collateral pool backing a particular security. These ratings will measure the number of notches that Moody's expects a rating to be downgraded if the loss rate on its underlying collateral pool increases to a high stress level.

"These two measures will provide more clarity about the credit characteristics of structured finance ratings," Michel Madelain, Moody's new chief operating officer, said in a release. "We believe they will provide investors greater insights into the risks of structured finance products."

New, But Notable?

One investor said that while he applauded Moody's effort, the market is still so cynical that the move does not make much of a difference in encouraging deal flow or in creating more confidence in the rating agencies.

Another market participant compared Moody's new ratings to the FLUX (Flow Uncertainty Index) scores for CMOs. He added that like the FLUX score, he did not feel Moody's latest changes would do much for ratings transparency. FLUX scores were developed by the National Association of Insurance Commissioners (NAIC) to measure the sensitivity of CMO cash flows to changes in the prepayment rate of the underlying MBS collateral under various scenarios. The NAIC tested seven predetermined interest rate scenarios. The higher the FLUX score, the higher the variability in the total cash flow across all seven scenarios.

A Market Driver

The drive behind these new procedures came from responses to a call for comment that Moody's issued earlier this year. The rating agency originally questioned whether or not it should differentiate structured finance and corporate ratings.

While market participants "overwhelmingly" rejected the separate ratings proposal, they did request additional information about the major drivers of structured finance risk. This includes 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 noted.

The rating agency said that it will gradually introduce the added features only to new deals and will begin at the end of the second quarter. The rating agency will start by using them on new securitizations of vehicle-backed assets.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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