Leaving to one side profound uncertainty about investors’ risk appetite for CDO product in the medium term, there is a strong possibility that the triple-A rating will become a rarity in structured credit.
First, Fitch raised the market’s ire by proposing to shift its methodology on synthetic corporate risk CDOs to a dramatically more conservative stance. The agency predicted, following the implementation of the new model, five-notch downgrades on average for deals rated under previous assumptions. Moody’s proposes doing away altogether with its well-known alpha numeric ratings scale for complex securities (in other words CDOs) and replacing it with one based purely on numbers or perhaps a special signifier to denote the asset class. Standard & Poor’s has also made some modest changes to its RMBS-backed CDO methodology.
Both Fitch’s and Moody’s proposals are a reaction to the fact that many ABS CDOs rated...
