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Capital Markets

CDOs: Fitch won’t add to crisis

Rating agency considers wider implications of CDO methodology change.

Fitch’s new, more conservative corporate CDO criteria were due to be announced on March 31. However, it is likely that there will be some slippage on that deadline because of the amount of feedback the rating agency has received. The new criteria would entail lower ratings on future trades – or lower leverage.

But because of widespread fears that an unleashing of the changes on existing CDOs would cause havoc as investors and dealers unwound positions, it appears highly likely that Fitch will introduce its new corporate CDO methodology in a manner that does not dramatically exacerbate the credit crisis.

"The interest and amount of feedback was in excess of expectations," says John Olert, head of structured credit at Fitch. "It’s difficult for some people to understand what we are trying to do, as it is taking place right in the middle of various challenges."

Forced unwinds of structured credit structures have mostly been limited to market-value structures. Cashflow CDOs of corporate risk have generally not been affected by ratings because the underlying collateral has mostly performed – despite dramatic spread widening of credit default swaps, indices, bonds and loans. However, in the light of the poor performance of structured finance CDOs (or ABS CDOs) Fitch Ratings decided to revise its CDO methodology, starting with corporate risk.

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