Ratings agencies move to restore their credibility
Saturday, 16 February 2008
Saskia Scholtes
THE recent moves by Standard & Poor's to revamp its governance procedures, analytics and ratings transparency mark the latest in a series of mea culpas from the leading credit rating agencies as they attempt to restore their credibility with investors.
Moody's, Fitch and S&P have in recent months come under intense fire from investors and regulators in the US and Europe after complex structured finance instruments they rated have suffered losses far in excess of the rating agencies' initial expectations.
Critics have said the ratings process must become more transparent. Others say the model is fundamentally flawed, because issuers of debt and structured products pay the agencies to issue a rating.
As a result, European and US policymakers have signalled they expect to see increased transparency and information from the agencies to remedy the perceived inaccuracy of ratings for such instruments. And the agencies are responding with proposals to reform their business models, their ratings methods and their loss assumptions for troubled securities.
Moody's lately proposed a new rating system for complex debt securities that would use numerical grades rather than letters, to help investors differentiate ratings for such securities from those for more traditional corporate and sovereign debt securities.
Fitch is reviewing its rating processes by individual product category and proposed new methods for rating complex debt securities backed by corporate debt, revised its loss assumptions for subprime mortgages and launched its second review of the bond insurance industry.
Fitch put the AAA credit ratings of bond insurers MBIA and CIFG on negative rating watch, just weeks after affirming the ratings of both companies.
"The need to update loss assumptions at this time reflects the highly dynamic nature of the real estate markets in the US, and the speed with which adverse information on underlying mortgage performance is becoming available," said Fitch.
The crisis in the subprime mortgage market has forced the agencies to downgrade hundreds of billions of dollars worth of securities backed by such mortgages, and to adjust loss assumptions as the US housing market continues to deteriorate. This in turn has negative knock-on effects for related securities such as collateralised debt obligations and for companies that guarantee payments on these instruments, such as the bond insurers.
S&P early this month downgraded or put on review for downgrade the ratings of more than $270bn worth of securities backed by subprime mortgages and more than $260bn worth of related CDO securities.
While S&P reviewed its loss assumptions on recent subprime mortgages to 19 per cent from 14 per cent, Fitch also took a more aggressive view of potential losses. The ratings agency put $139bn of mortgage bonds on review for downgrade after revising its loss assumptions for 2006 and 2007 subprime mortgages to 21 per cent and 26 per cent respectively.
Part of the problem, say rating agency analysts, is that as the housing market continues to deteriorate, losses have become a fast-moving target that is difficult to track.
"Getting our arms around the potential losses is very difficult at this point," says Thomas Abruzzo, managing director at Fitch.
.................................
Under syndication
arrangement with FE
THE recent moves by Standard & Poor's to revamp its governance procedures, analytics and ratings transparency mark the latest in a series of mea culpas from the leading credit rating agencies as they attempt to restore their credibility with investors.
Moody's, Fitch and S&P have in recent months come under intense fire from investors and regulators in the US and Europe after complex structured finance instruments they rated have suffered losses far in excess of the rating agencies' initial expectations.
Critics have said the ratings process must become more transparent. Others say the model is fundamentally flawed, because issuers of debt and structured products pay the agencies to issue a rating.
As a result, European and US policymakers have signalled they expect to see increased transparency and information from the agencies to remedy the perceived inaccuracy of ratings for such instruments. And the agencies are responding with proposals to reform their business models, their ratings methods and their loss assumptions for troubled securities.
Moody's lately proposed a new rating system for complex debt securities that would use numerical grades rather than letters, to help investors differentiate ratings for such securities from those for more traditional corporate and sovereign debt securities.
Fitch is reviewing its rating processes by individual product category and proposed new methods for rating complex debt securities backed by corporate debt, revised its loss assumptions for subprime mortgages and launched its second review of the bond insurance industry.
Fitch put the AAA credit ratings of bond insurers MBIA and CIFG on negative rating watch, just weeks after affirming the ratings of both companies.
"The need to update loss assumptions at this time reflects the highly dynamic nature of the real estate markets in the US, and the speed with which adverse information on underlying mortgage performance is becoming available," said Fitch.
The crisis in the subprime mortgage market has forced the agencies to downgrade hundreds of billions of dollars worth of securities backed by such mortgages, and to adjust loss assumptions as the US housing market continues to deteriorate. This in turn has negative knock-on effects for related securities such as collateralised debt obligations and for companies that guarantee payments on these instruments, such as the bond insurers.
S&P early this month downgraded or put on review for downgrade the ratings of more than $270bn worth of securities backed by subprime mortgages and more than $260bn worth of related CDO securities.
While S&P reviewed its loss assumptions on recent subprime mortgages to 19 per cent from 14 per cent, Fitch also took a more aggressive view of potential losses. The ratings agency put $139bn of mortgage bonds on review for downgrade after revising its loss assumptions for 2006 and 2007 subprime mortgages to 21 per cent and 26 per cent respectively.
Part of the problem, say rating agency analysts, is that as the housing market continues to deteriorate, losses have become a fast-moving target that is difficult to track.
"Getting our arms around the potential losses is very difficult at this point," says Thomas Abruzzo, managing director at Fitch.
.................................
Under syndication
arrangement with FE