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Capital Markets

Ratings: Yet more triple-A ratings are under threat

Fitch’s proposed new methodology will tighten CDO ratings, and Moody’s is considering abolishing its current ratings scale altogether.

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 by all the rating agencies have not lived up to the rankings initially bestowed on them. What was called a triple A was not in fact a triple A, and in many cases not even of investment grade. Fitch’s approach is brave, although there is the possibility that it will lose a lot of business as a result of trying to match CDO ratings with standalone credit ratings.

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