Fitch Ratings launched a new Index of Rating Change aimed at presenting a different perspective on rating migration that looks at the market as a whole, by asset class and in terms of the countries where these assets are domiciled.
"By weighting rating changes as it does, the new index is more representative of the effect of rating actions on the hypothetical average investor in the sector," Alison Ho, associate director at Fitch, said.
The new index tracks the quarter-by-quarter change in the weighted average Fitch rating factor for the universe of European structured finance tranches at the beginning and end of each quarter. The index covers all four main market sectors in European structured finance: ABS, CDOs, CMBS and RMBS.
Rating changes have caused the weighted average default probability of Fitch-rated European structured finance transactions to deteriorate by 23% since December 2002. The CDO sector has been the weakest of the four main sectors, with a 43% deterioration in default probability as measured by rating actions over the two year period from December 2002 to the end of 2004. With the subsequent recovery in the corporate credit environment, rating changes show that there has been a 10.9% improvement in the average default probability of CDOs since then.
RMBS has been the strongest sector as its weighted average default probability has improved by 2.7% as measured by rating actions over the past15 quarters. The CMBS index declined 5.5% during the first half of the period under review as a result of broadening upgrade activity - which was led by Italian nonperforming loan transactions - that has allowed it to recover to around the 100 base level.
Fitch plans to produce updates to its index early in each quarter. Next year the agency is looking to broaden the range of parameters for which subindices are calculated and to complement the index of rating change, presented here, with a weighted-average rating index. This planned release is designed to calculate weighted-average ratings for all European structured finance transactions.
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