Fitch Eyes Complementary SF Rating Scales

Fitch Ratings has announced a review to evaluate potential complementary scales for structured finance deals that might improve transparency, provide added information, and address critiques of such ratings. Fitch said it now uses only one rating scale, but noted growing debate about the suitability of this approach for structured deals. In response, the rating agency has suggested three complementary scales for such deals. Loss Given Default ratings would try to quantify recoveries (on a tranche-level basis) that a structured finance creditor would likely receive in a default. Fitch said an LGD scale would address the common criticism that a structured finance tranche and a corporate bond with the same rating may have similar default characteristics, but that actual losses in a default "may differ materially." Transition/Stability ratings would try to capture the likelihood of a rating change in a given period, and Collateral ratings would try to measure the aggregate quality of a deal's underlying collateral. Fitch said it will begin to issue drafts on the proposals by early June, but welcomes "preliminary feedback."