Bangkok--18 Feb--Fitch Ratings
Fitch Ratings announced today that it is to assign Loss Severity (LS) ratings to structured finance transactions. The latest in a series of steps by Fitch to enhance the quality and transparency of its credit ratings, LS ratings are designed to complement traditional debt ratings, giving an indication of the relative degree of risk that a security might suffer a high loss severity in the event that the security defaults.
"Since Fitch first proposed a Loss Severity rating scale in July 2008, we have received numerous comments indicating that this scale would give users of structured finance ratings the most valuable additional analytical insight," says Stuart Jennings, structured finance risk officer for the EMEA region at Fitch Ratings. "The aim of the scale is to complement the existing Long-term credit ratings for structured finance securities which exclusively address the probability of default of a security, the so-called 'first dollar of loss.'"
"LS Ratings represent a distinct structured finance rating scale and help differentiate such securities from other debt securities, such as corporate bonds," says Glenn Costello, structured finance risk officer for the Americas at Fitch. "This is an issue that has been highlighted in recent months, particularly by the regulatory community."
Fitch already has a separate Recovery Rating scale. Recovery Ratings (RR) are assigned to securities that are deemed to be distressed (rated 'C' to 'CCC'), where there is a real prospect of default. As a relative measure, the LS rating differs to the RR scale. RRs provide an ordinal opinion based on absolute recoveries or loss severity, rather than relative recoveries or loss severity as would be indicated by the LS rating.
Fitch recognises that the provision of two scales - one relative, one absolute - addressing recovery given default may be confusing to users. For this reason, LS ratings will only be assigned to securities which are not deemed to be distressed. This will mean that only securities rated in the 'AAA' to 'B' categories will be assigned a LS rating. In the event that a security becomes distressed and the Long-term rating is lowered to the 'CCC' to 'C' range, then the LS rating will be withdrawn and a RR rating will be assigned.
A clear and concise simple indicator, the LS rating scale will consist of five rating categories from 'LS-1' to 'LS-5'. It is likely that the vast majority of Fitch-rated transactions will be assigned LS ratings within 12 months.
The LS rating methodology is detailed in a criteria paper published today. "Criteria for Structured Finance Loss Severity Ratings" is available on the agency's public website, www.fitchratings.com. The first LS ratings were assigned today to Dutch RMBS tranches. Further information regarding the Dutch RMBS LS Ratings can be obtained in the comment "Fitch Assigns 472 Loss Severity Ratings to Dutch RMBS Tranches" available from www.fitchresearch.com.
Contacts: Stuart Jennings, London,
Tel: +44 (0) 20 7417 6271; Ian Linnell: +44 (0) 20 7417 4344; Ben McCarthy, Sydney, Tel: +61 2 8256 0388; Glenn Costello, New York, Tel: +1 212-908-0307, John Bonfiglio: +1 212-908-0517.
Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: [email protected]; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: [email protected]; Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: [email protected]; Hannah Warrington, London, Tel: +44 (0) 207 417 6298, Email: [email protected].
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.