In previous coverage of the notching study conducted by the National Economic Research Associates Inc. (see ASR 10/27/03), sources familiar with the drafts said, "There is something in this report that all parties can point to and be happy with." Below are aspects of the study, as presented in the executive summary, that each of the three rating agencies cited as positive.


* The credit rating differentials between Fitch and the other two agencies have become smaller in recent years. At year-end 2001, on average Moody's rated lower than Fitch by 0.3 notches, S&P rated lower than Fitch by 0.1 notch, and Moody's rated lower than S&P by 0.1 notch.

* Moody's ratings matched S&P overall (with a standard deviation of about 1 notch after five years), and for speculative grade Moody's ratings go from no difference at issue to about 1 notch lower than S&P (standard deviation of about 2 notches) after five years.

* Comparisons of reported ratings changes indicate some differences between each agency's single-rated issues and issues rated by other agencies. Performance differences equate to less than a one-half notch overall, but exceed one notch for speculative grade ratings in some sectors.


* Ratings differences increase as time elapses from new issuance. Fitch's ratings go from 0.3 notches higher than Moody's at issuance to about 1 notch higher than Moody's overall after five years, with a standard deviation of about 1.5 notches; for speculative grade issues after five years, Fitch's ratings were nearly 3 notches higher, with a standard deviation of almost 2 notches.

*Analysis of historical ratings changes indicates differences across agencies overall and in each of the four sectors considered. The differences are statistically significant. In certain sectors, it may not be possible to draw statistically significant conclusions regarding ratings differences because ratings several notches apart have historically similar probabilities of upgrades and downgrades.

* There are significant differences in the frequency and direction of ratings changes between single- and multi-rated issues, particularly for those not rated AAA. Fitch and Moody's speculative grade ABS had more downgrades on their single-rated deals than on their multi-rated deals. Fitch and S&P speculative grade RMBS had fewer downgrades on their single-rated deals than on their multi-rated deals.


* S&P was more likely to initiate a downgrade in ABS than Fitch; S&P was more likely than Fitch or Moody's to initiate a downgrade in RMBS; Moody's and S&P were more likely than Fitch to initiate CDO downgrades, although there were comparatively few CDO observations.

* S&P was the only rater on more than half the issues it rated in synthetics (CDO), student loans (ABS), and commercial properties (CMBS). Such concentration may result from specialized expertise, "rating shopping" by issuers, or other factors.

* Based on the transaction data provided by each agency, Moody's and S&P had similar numbers of ratings (excluding undisclosed ratings). In RMBS, the numbers of ratings were roughly equal. Fitch ratings were provided on a slightly higher number of the RMBS and CMBS relative to S&P and Moody's.

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