In the latest incarnation of notching research, Moody's Investors Service recently released a study which demonstrates, according to the rating agency, that Moody's RMBS ratings would often not match the ratings on the same transaction by Fitch Ratings and Standard & Poor's (had Moody's rated them).
For its data set, Moody's looked at more than 700 tranches that it did not rate, from 169 transactions. The rating agency said that many of these tranches were not rated by Moody's because it had asked for higher credit enhancement levels.
"The study ... showed that Moody's ratings would have generally been lower, often substantially lower, than the ratings assigned by the other agencies," Moody's said in the study.
Moody's said it would be reviewing its notching practices for non-Moody's-rated RMBS over the next few weeks.
Also last week, Moody's released another special report outlining how it treats non-Moody's-rated collateral for Moody's-rated CDOs. The upshot of the research was that the agency has determined that a small bucket for non-Moody's collateral can be incorporated into Moody's-rated CDOs without any significant impact on Moody's ratings of the CDO tranches. However, it is imperative that the non-Moody's bucket for notched credits is limited to no more than 20% of the pool because "the acceptance of notching effectively dilutes our independent credit opinion, as well as defeats our ability to monitor and adjust our ratings in a timely fashion," the report said.
According to the agency, the crux of the rating differential between the agencies is the fact that unlike S&P and Fitch, Moody's structured finance ratings are based on expected loss - not just default scenarios and stress scenarios. In other words, expected loss analysis, unlike stress-test studies, captures both default probability and the distribution of recovery rates upon default.
Meanwhile, the National Economic Research Associates (NERA) announced last week that it has finalized the strategy of its research plan, which will study comparability of structured finance ratings from the three agencies. The study is being sponsored by Moody's, though NERA is explicit in stating the study will be conducted independently.