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Fitch: Limited Negative 'AAA' Rating Migration for EMEA Structured Finance Through the Crisis

Global Arab Network - - Mohammed Almasri

Thursday, 25 February 2010 12:04

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Fitch Ratings has published detailed data that outlines the migration of its Europe, the Middle East and Africa (EMEA) structured finance ratings through the current financial crisis. The data, published in the agency's "EMEA Structured Finance Snapshot", shows that high-investment grade structured finance ratings in the region have proven resilient.

The vast majority of Fitch's EMEA 'AAA' structured finance ratings have remained stable through the crisis. 78.6% of EMEA structured finance securities rated 'AAA' at the start of the crisis either retained their 'AAA' rating or had been paid-in-full two-and-half years later. The findings will be discussed on a teleconference later today.

"This data will help to re-focus the debate regarding the performance of structured finance ratings on fundamental credit issues," said Ian Linnell, Global Head of Structured Finance at Fitch Ratings. "Credit ratings do not address the heightened mark-to-market risk that we've seen through this crisis. As the prices of highly-rated securities fell, rating agencies were criticised in Europe for not downgrading the tranches in question, but from a credit perspective most have performed as anticipated and prices have now rebounded to close much of this credit versus liquidity gap."

In contrast, 56% of non-investment grade structured finance ratings in EMEA were downgraded during the period compared with 19.3% of investment grade ratings.

"Downgrades, particularly of junior notes, are to be expected during a crisis of this magnitude. It shows that the junior capital tranches, which are designed to protect the senior notes by absorbing cyclical losses have done exactly that," says Linnell.

However, Fitch recognised early on in the crisis ratings in some CDO sectors would not perform in line with the agency's expectations and Fitch launched a major revision of its structured credit criteria in late 2007. These criteria enhancements coupled with credit deterioration in the sector resulted in significant downgrades of CDOs across the rating spectrum. 47.9% of the agency's structured credit portfolio was downgraded over the 2.5 year period from July 2007. However, despite the weakness in the sector half of the agency's EMEA CDO ratings remained stable or the securities were paid-in-full.

"Fitch had revised the majority of its synthetic CDO ratings to be in line with its new criteria before the wave of financial institution credit events in September and October 2008. These updated ratings proved resilient, with downgrades directly as a result of these credit events largely confined to junior notes," said Linnell.

Global Arab Network

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