Fitch Exposure Draft: New Methodology for Structured Finance Distressed Recovery Ratings

Fitch Ratings has published for comment an exposure draft of a new global methodology for assigning Distressed Recoveries (DRs) ratings on structured finance transactions. DRs are designed to estimate recoveries on a forward-looking basis while taking into account the time value of money.

While Fitch continues to assign long-term credit ratings that incorporate elements of recovery based on the outstanding contractual security balance, the addition of a DR provides an enhanced analytical approach to securities that are distressed or defaulted. Additionally, the increased information on forward recoveries will be particularly useful for CDOs and other structured vehicles that increasingly purchase SF assets and should foster greater overall price transparency.

Summary of Proposed Changes:

• DRs will be distinct from long term ratings, as they will measure recoveries on a ‘go forward’ basis and will discount all cash flows, irrespective of whether the source is interest or principal, in assigning the DR.
• DRs will be issued on a scale of ‘DR1′ (highest) to ‘DR6′ (lowest) to denote the range of recovery prospects given to a currently distressed or defaulted security. These distressed recoveries will be issued in addition to LTCRs for rated securities in residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), asset-backed securities (ABS) and collateralized debt obligations (CDOs).
• In conjunction, Fitch will be adopting a revised rating scale for SF bonds that no longer assigns ‘D’ ratings to defaulted issues. Instead, distressed and defaulted issuers will be rated on a scale of ‘C’ to ‘B’ based on the degree of likely impairment vis-a-vis original contractual terms and will be accompanied by a DR that further identifies the bonds as distressed/defaulted.

The proposals are being released in the form of this exposure draft with a one-month comment period for the purpose of soliciting market feedback and commentary in advance of implementing any methodology or rating changes. Fitch welcomes any comments investors, issuers and other market participants may have pertaining to this exposure draft. Comments should be sent via e-mail to Marion Silverman in the United States at ‘marion.silverman@fitchratings.com’ and Olivier Delfour in Europe at ‘olivier.delfour@fitchratings.com’ by March 31, 2006.

The report ‘Structured Finance Distressed Recovery Ratings’ is available on the Fitch Ratings web site at www.fitchratings.com.