Fitch Ratings says that one-in-three rating proposals for new structured finance (SF) deals need a substantial overhaul before the agency can proceed with assigning new ratings to the transaction. In particular, Structured Credit proposals based on collateralized debt obligations (CDOs) raise more warning flags than more traditional instruments such as mortgage-backed securities.
Since launching its Transaction Filtering Committees (TFCs) in 2009, Fitch has received 849 preliminary SF rating proposals, 31.5% of which required substantial credit or structural issues to be addressed before the rating process could proceed. In addition, Fitch has rejected nearly one in 10 proposals outright, designating them as unrateable.
Fitch provides detailed analysis of its filtering committee results in the report Strengthening the Ratings Process. In total, Fitch has classified 8.7% of transactions as ‘Red’ or unrateable. Fitch designates the the aforementioned 31.5% as ‘Amber’, which means that the deal requires specific issues to be addressed if the rating process is to continue.
The Structured Credit (CDOs) teams classify transactions as ‘Amber’ or ‘Red’ at a much higher rate than the cumulative global average – 38% of transactions in Structured Credit were classified as Amber compared to 31.5% for the larger Structured Finance group while 22.3% of Structured Credit proposals were Red (compared to 8.7%). These results are to be expected as these teams routinely see more esoteric, innovation and higher risk proposals than other groups.
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In addition, these figures are conservative as they exclude transactions which were declined by the agency at a very early stage due to specific credit or criteria issues. The results are broken down by group (RMBS, ABS, CMBS, and Structured Credit) and by region (North America, EMEA, Latin America, and APAC). Fitch also discusses the rejection rates by group and examines quarterly rejection rates.
Irrespective of the outcome of a TFC, Fitch will not automatically rate the transaction. For example, issues raised for ‘Amber’ transactions may prove ultimately insoluble. In fact, only a quarter of such transactions were ultimately assigned a rating. Even for ‘Green’ transactions, only 57% were eventually assigned a rating often due to new issues emerging that were not highlighted during Fitch’s TFC.