Fitch set to revise market value CDO ratings methodology

Fitch Ratings says it will be unlikely to rate "knock-out" market value structures higher than BBB in future, under proposed new methodology for rating market value CDOs. It defines "knock-out" market value structures as those with a deep out-of-the-money trigger which, when breached, result in minimal recoveries, and it includes in this category leveraged super seniors with market value or spread triggers, CPDOs and SIV capital notes.

The rating agency has been critical of the triple A ratings other agencies have given CPDOs in the past, and has not rated any CPDOs to date. However, it has given AAA ratings to a number of leveraged super seniors incorporating spread triggers.

Fitch says it will still consider rating "traditional" market value structures AAA, but it warns that its stress-testing will likely become more stringent, and this is likely to increase the amount of subordination that these deals need for a given rating, particularly at the higher rating levels.

It defines traditional market value deals as those subject to a gradual deleveraging if the market value of the portfolio falls by a defined amount.

The rating agency has asked for comments on its new exposure draft for market value structures, published yesterday.