Fitch to Increase EMEA Structured Finance Criteria Updates; Rating Impact to Decline

LONDON–(BUSINESS WIRE)– Fitch Ratings continues to make enhancements to its rating criteria for Structured Finance and Covered Bonds, with the effect of changes both for existing and new transactions likely to diminish over time.

Fitch will review its methodologies annually at a minimum, as per its code of conduct and in advance of the coming into force of a European regulation to this effect.

‘Criteria review is a vital part of our rating process, but criteria review does not necessarily imply criteria change,’ said Marjan van der Weijden, Head of EMEA Structured Finance for Fitch, ‘In fact, Fitch is striving for a somewhat inverse, more-is-less approach with criteria changes, with the impact on ratings to lessen as criteria updates become more frequent.’

Fitch receives a number of inquiries from investors and issuers alike about the likely impact of any criteria changes. Fitch addresses these questions in its quarterly EMEA Structured Finance Snapshot (most recently published on 24 January of this year) by including a section summarising all criteria currently in force in EMEA. Fitch also highlights forthcoming criteria changes and indicates what will be the likely rating impact for both recently published and forthcoming publications. Although it is not universally the case, the trend is now for these updates to become quite minor in terms of the scope of changes and their impact on ratings of existing transactions.

Specific examples over the last month have been Fitch’s 14 March report, ‘Counterparty Criteria for Structured Finance Transactions’. The accompanying press release indicated no rating impact. Additionally, Fitch’s ‘EMEA Residential Mortgage Loss Criteria Addendum – Netherlands’, published on 8 March showed that the impact was generally positive for the more senior classes but mildly negative for the junior classes.

Over the course of the coming weeks, Fitch expects to publish, amongst others, its updated ‘Criteria for European CMBS’ and its revised ‘Criteria for Rating Transactions of Dutch NHG-Insured Mortgage Loans’. Since the downturn, the scope of CMBS rating analysis has expanded as additional sources of market, operational, legal and idiosyncratic risk have been observed. Consequently, Fitch has taken significant negative rating action in this sector in recent years. The new criteria report reflects these developments more formally, and also outlines the principles according to which core rating assumptions are periodically determined in a counter-cyclical manner. As these broad changes are already factored in the rating analysis, the publication is not expected to result in rating changes to existing transactions.

With respect to the Dutch NHG criteria, Fitch currently has tranches from 15 programmes on Rating Watch Negative following the publication of Fitch’s exposure draft in March 2010. The criteria address numerous concerns that Fitch raised last year, specifically compliance risk, the consideration of the seller’s commitment to repurchase non-compliant loans and treatment of the amortising insurance coverage. Publication of the final criteria was delayed to allow time to reflect possible enhancements to the NHG scheme that were under discussion. Ultimately, the proposed enhancements did not take place. The publication of the final criteria will likely result in Fitch downgrading a number of transactions unless the affected transactions are restructured.

Fitch’s next edition of ‘Snapshot’ is expected to be published in early May, with the Criteria Timeline updated to reflect criteria published by that date and the schedule for further publications.

Additional information is available at ‘www.fitchratings.com‘

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Fitch Ratings
Marjan van der Weijden
Managing Director, Head of EMEA Structured Finance
+44 20 3530 1365
Fitch Ratings Ltd, 30 North Colonnade, London, E14 5GN
orEuan GatfieldManaging Director, EMEA CMBS+44 20 3530 1157
orGregg KohanskyManaging Director, EMEA RMBS+44 20 3530 1376
orPhilip WalshManaging Director, EMEA Structured Finance Business & Relationship Management
+44 20 3530 1029
or
Media RelationsMark Morley, +44 0203 530 1000
mark.morley@fitchratings.comSandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Source: Fitch Ratings