CDO Ratings To Fall As Rating Agencies Overhaul Criteria
John Glover of Bloomberg.com reported today that Collateralized Debt Obligations (CDOs) might be downgraded by as many as five levels as Fitch Ratings reviewed its criteria for rating $220 billion of such products after the massive mortgage-related losses from the subprime contagion.
AAA-rated CDOs that are based on credit-default swaps and are not actively managed will suffer the biggest cuts. CDOs that package high-yield assets may be cut three levels for the tranches first in line for losses.
Moody’s Investors Service also announced yesterday that it may overhaul its system for rating structured-finance products to include, among other things, a numerical scale and an “.sf” designation to signify a structure-finance ranking from a corporate credit grade.
The ratings agencies are reacting to criticism that they failed to react quickly enough as rising defaults on subprime mortgages caused the value of CDOs to plunge and produced billions of dollars of losses. According to John Olert of Fitch, the firm wants to “challenge existing CDO rating assumptions” and “produce ratings that perform similarly in terms of default risk and ratings migration with the market’s expectation for other asset classes.”
This leaves unanswered the question of why it took the massive losses from the subprime contagion for the ratings agencies to do so.
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