Fitch revises structured finance CDO methodology due to subprime risk

Fitch Ratings has revised its methodology for rating structured finance CDOs to reflect the increased risk associated with subprime RMBS as portfolio collateral. The additional criteria changes include a modified methodology for treatment of US subprime bonds on rating watch negative to assume a three subcategory downward rating adjustment for purposes of the rating definition used in Fitch's Default VECTOR model. It will also take into consideration additional risk factors such as those affecting recently issued subprime RMBS, Alt-A performance and closed-end second lien RMBS. The methodology also increases assumed default probability for US subprime bonds issued since 2005 by 25%, which was already announced in July.