Fitch Outlines Approach to Initiated Ratings in Global Structured Finance

NEW YORK & LONDON & SINGAPORE--(BUSINESS WIRE)-- Over the last two years there have been several major initiatives to improve transparency in the global structured finance market and provide more information to investors as well as to the market in general, according to Fitch Ratings. In addition to these industry-wide efforts (all of which Fitch supports), recent regulatory initiatives in the U.S. and Europe make it increasingly possible for rating agencies to assign credit ratings to structured finance issues without the cooperation of the relevant issuer or arranger. Such ratings are commonly referred to as unsolicited ratings.

Historically, transparency levels in the structured finance market were generally insufficient to assign unsolicited ratings. As a result, Fitch was typically constrained to issuing sector or geographic level commentary on transactions or structures for which it had a significantly different credit opinion than that indicated by the publicly available ratings. Fitch's recent commentary on U.S. re-REMICs is an example.

Although the new regulations give more flexibility, Fitch does not expect to assign unsolicited ratings on a frequent basis.

"Fitch's primary role is to service the needs of investors. As a result, the agency will typically only assign unsolicited ratings where there is strong investor interest and it has a materially different credit opinion on a transaction compared to those expressed by mandated rating agencies," says Ian Linnell, Global Head of Fitch's Structured Finance Group. "In addition, for benchmark transactions, either in a particular sector, country or product, we will consider using the additional information to issue more research reports as well as the possibility of assigning ratings."

"We believe that a considered and disciplined approach to assigning unsolicited ratings, including publishing them on a timely basis, will provide investors with the most value," adds Linnell.

The increased availability of information may also affect situations where issuers or arrangers request Fitch to remove its existing ratings. The decision to withdraw a rating rests with Fitch. In the past such requests have usually been met as publicly available information on structured finance deals was typically insufficient to maintain the rating. This may no longer be the case under the new regulations.

"Where issuers request that Fitch withdraws its ratings from an existing issue in order to be replaced by another agency, Fitch will consider very carefully whether it should keep investors informed of Fitch's view on the transaction by maintaining an unsolicited rating. In particular, if the agency believes that the request is due to credit reasons, a practice commonly referred to as 'ratings shopping', then Fitch will aim to maintain the rating. This is clearly in the interests of investors as well as the broader market as a whole," states Linnell.

The ability to assign unsolicited ratings in structured finance has been made possible by the United States Securities and Exchange Commission, which has adopted an amendment to Rule 17g-5 relating to rating agencies registered as Nationally Recognised Statistical Rating Organisations (NRSROs).

Effective June 2, Rule 17g-5 requires arrangers (defined as issuers, sponsors or underwriters) that hire an NRSRO to rate any new structured finance security, to provide written representations to the NRSRO being hired obligating the arrangers to make available to any NRSRO - whether hired by the arranger or not - all information provided to the hired NRSRO. This applies to both the determination of the initial credit rating and for ongoing surveillance.

While non-U.S. issuers selling securities to non-U.S. investors are currently exempt from Rule 17g-5, the exemption is only for six months. In addition, a European Union version of 17g-5 was proposed by the European Commission on 2 June 2010. The proposal is in the form of an amendment to the existing EU CRA Regulation [Regulation (EC) no 1060/2009 of the European Parliament and of the Council of Sept. 16, 2009 on credit rating agencies, and creates new Articles 8a and 8b. It is included with other amendments that introduce the new EU securities regulator (the European Securities and Markets Authority -- ESMA) as the EU supervisor for CRAs.

There is no formal public consultation on this package of amendments; they are currently being debated in the EU Parliament and the Council. The Commission's current proposed timetable is for ESMA to be operational at the start of 2011. Therefore, the new Articles 8a and 8b could be operational in early 2011.

This statement is based on an article written by Ian Linnell that appears in the latest edition of Fitch's quarterly 'EMEA Structured Finance Snapshot' report, published earlier today. The report is available at 'www.fitchratings.com'.

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

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CONTACT:

Fitch Ratings
Ian Linnell, +44 (0)20 7417 4344 (London)
Kevin Duignan, +1-212-908-0630 (New York)
Julian Dennison, +44 020 7682 7480 (Media Relations, London)
julian.dennison@fitchratings.com
Sandro Scenga, +1-212-908-0278 (Media Relations, New York)
sandro.scenga@fitchratings.com
Leslie Tan, +65 67 96 7234 (Media Relations, Singapore)
leslie.tan@fitchratings.com

KEYWORDS:   United States  North America  New York

INDUSTRY KEYWORDS:   Professional Services  Finance

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