Fitch Proposes New Default And Recovery Rating Scale

Fitch Ratings has proposed a new rating scale designed to "provide greater transparency into the interplay between default risk and loss given default than heretofore has been available to the market."

Fitch said the new methodology would be global in scope, include a benchmark measure of default probability (the issuer default rating), and a new recovery rating scale.

The recovery rating scale would focus on lower rated, speculative grade securities, Fitch said. The addition of more information on recovery prospects, in conjunction with the issuer default rating, recognizes the market's need for bifurcated information on the two main elements of credit risk, Fitch said.

Fitch's enhanced methodology is being introduced to the market as an "exposure draft" to solicit feedback from investors, issuers, and other market participants during a one-month comment period.

The proposed reco-very scale ranks securities on a scale of R1 (high recovery) to R6 (low recovery), providing a better estimate of potential recovery values in the event of bankruptcy or liquidation, Fitch said. The ratings will be published in conjunction with traditional credit ratings.

The new issuer default rating, which will take the place of the existing long-term rating, will be assigned to companies and sovereigns and will reflect the ability to meet financial commitments on a timely basis, without regard to recovery prospects.

The increasing complexity of debt offerings, the emergence of credit derivatives, Basel II and losses experienced during the last credit downturn have heightened the market's interest in measures of loss given default, said Roger Mer-ritt, managing director at Fitch, in a news release.

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