RPT-Fitch Updates Global Rating Criteria for Corporate CDOs
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July 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has updated its global rating criteria for corporate collateralised debt obligations (CDOs). The report replaces the Global Rating Criteria for Corporate CDOs", dated 8 August 2013. The agency does not expect any rating changes from the implementation of this criteria update.
The updates include (i) application of concentration stresses in the surveillance analysis, (ii) minor changes to the industry sector mapping (iii) a description of 'CCC' bucket modelling for cash flow analysis of overcollateralisation tests in CLOs, and (iv) a description of the application of the Criteria for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds.
Fitch has revised the surveillance approach for Corporate CDOs by applying concentration stresses in the surveillance analysis of existing CDOs as well as in the analysis of new CDOs. The concentration stress includes a correlation and recovery stress to the five largest risk contributors in the portfolio.
Nevertheless, rating committees may choose not to apply model-implied rating actions where the transaction portfolio is not expected to see a sustained change in performance and where there is, as a result, an expectation that there could be a short term reversal of such a rating action. Any such departures from model-implied results would typically not exceed a rating category.
While Fitch does not expect the application of concentration stresses to existing ratings to have any rating impact it may result in the deferral of any future upgrades for first generation European CLOs that have started to deleverage.
As part of the changes in the industry and sector mapping the industry 'textiles and furniture' was remapped to the retail, leisure and consumer sector and 'business services' was created as a standalone sector to address the diverse nature of the industry group. The changed mapping will result in slightly lower correlation in portfolios with a significant share of assets in the business services sector. This will have a marginally positive impact on default rates, particularly for higher ratings. However, testing showed that for typical portfolios there will be no rating impact.
The updated criteria provide a more detailed description of the 'CCC' bucket modelling approach as part of Fitch's cash flow analysis of European CLOs. The first generation of CLOs have shown that the efficiency of par value tests can be greatly improved by incorporating haircuts to the value of 'CCC' and lower-rated assets. Historical data show that more than 80% of rated corporates that defaulted had ratings that were in the 'CCC' category or lower prior to default.
The CLO-specific application of the Criteria for Sovereign Risk in Developed Markets for Structured Finance and Covered Bonds and its effect had already been published in a commentary 'No Immediate Rating Impact on European CLOs From SF & CVB Sovereign Criteria' dated 19 May 2014.
The report is available at www.fitchratings.com or by clicking on the link below.
For all of Fitch's Eurozone Crisis commentary go to here
Link to Fitch Ratings' Report: Global Rating Criteria for Corporate CDOs