CreditSights Welcomes Fitch’s New CDO Ratings Methodology
CreditSights has weighed in on Fitch’s proposed changes to corporate structured finance ratings methodologies. In general, CreditSights likes what it sees, though it remains concerned about the element of subjectivity.
“The changes are conservative in nature and aim for a higher standard for corporate collateralized debt obligation,” CreditSights says. ”Probability of default and correlation have been raised while recovery rates have been lowered - driven by the debt financing shift to senior secured financing.”
Overall the move is a good one, but the market must ask itself where it wants to be on subjective and opaque versus empirical and clear. There are benefits and detriments to both.
CreditSights is impressed with Fitch’s effort to address the common problems that have plagued all of structured finance for the past few years. “The market has already acted vocally on the ‘a rating is a rating is a rating’ issue, rebuffing attempts by Moody’s to create a specific SF ratings methodology that would be held to different standards than that of traditional corporates. The move by Moody’s was also roundly seen as a tacit admission that ‘a rating is not a rating’ after all and that past expressions of such a view by the ratings agencies will remain under a cloud. ”
“The impacts of the proposed changes could roil the market to some degree, despite Fitch’s position as a distant third in corporate CDO rating market share,” CreditSights says.
CreditSights’ detailed analysis of Fitch’s methodology is available for purchase. Fitch’s methodology can be reviewed at fitchratings.com (registration required).
CreditSights has also updated its Mark-to-Market Model for Super Senior Tranche of ABS CDOs. The bottom line:
Our model’s estimated mark-to-market write-down suggests that ABS CDO super senior tranches should now be marked around 69 cents, versus the 76.5 cents we estimated in November.
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