Fitch to Stick With Existing Ratings Scale for SIVs
Fitch Ratings has decided to continue to use its existing ratings scale to rate Market Value Structures such as Special Investment Vehicles, as there was limited market appetite for a proposed separate ratings scale for these instruments. Based on the feedback to its request for comment, Fitch said it has revised its criteria as follows:
- Traditional MVS may be rated as high as ‘AAA’, subject to additional stresses. Traditional MVS are those structures with deleveraging/protection based triggers that are set “outside of the tranche,” such that the transaction may be able to undertake an orderly deleveraging/unwind without loss to the rated notes.
- MVS backed by less liquid asset types will not be eligible, in most cases, to receive ratings above ‘A’. MVS with illiquid assets will not be eligible, in most cases, for investment-grade (IG) ratings and may, in fact, not be eligible to be rated.
- Ratings for “Knock-out” MVS, in most cases, will be capped at ‘BBB’. Knock-out MVS are those structures with high loss triggers set “inside of the tranche,” such that the transaction may unwind with a significant/total loss to the rated notes.
- Limited weight, if any, will be given to partial liquidity mechanisms unless such a mechanism provides clear structural benefits.
Given the concern of market participants regarding transparency of MVS, Fitch is re-emphasizing the importance of transparency from managers in their ongoing reporting.
- Fitch will apply both quantitative and qualitative considerations when analyzing MVS. Quantitative factors will include new and updated advance rates (AR)/overcollateralization (O/C) ranges for various asset types based on data that include the recent stress that has occurred beginning in latter half of 2007. Qualitative factors will include structural market changes that may render past performance data less relevant, manager skill set, pricing procedures, and any data limitations.
- Ranges of ARs at each ratings level will be established by classifying asset types into a limited number of categories. Assets will be assigned to these categories based on their expected liquidity and volatility, particularly with respect to their performance throughout this current market crisis and other stressed market conditions, as well as their structural complexity and transparency. Assignment to categories will be fluid, and assets may move from one category to another based on Fitch’s developing views.
- Fitch will use the new criteria to surveill and re-evaluate its ratings on all existing MVS transactions.Within this framework, Fitch will evaluate MVS transactions on a case-by-case basis taking into account the nature of the assets and any unique structural features. All proposed transactions will be presented to a standing MVS committee, which will apply the framework set out in this report to analyze each transaction’s risks and merits.
MVS can be either cash or synthetic structures. In either case, as with other asset-backed securities (ABS), the issuer of debt is typically a bankruptcy-remote special purpose vehicle. A security interest in the assets purchased with the proceeds of the debt is created for the benefit of the noteholders, and the assets are held by a trustee. In cash structures, debt proceeds are used to purchase a portfolio of securities that is managed by an investment manager. In synthetic transactions, debt proceeds are used to purchase a portfolio of short-term highly rated securities, and market risk is introduced primarily via a credit default swap or a total return swap between the issuer and a third party.
Details are available in Rating Market Value Structures.
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