NEW YORK & LONDON & HONG KONG--(BUSINESS WIRE)--Following a comprehensive global review of the 431 Fitch-rated structured finance collateralized debt obligations (SF CDOs) representing $300.1 billion of outstanding debt, Fitch has placed 150 transactions, representing $36.8 billion, on Rating Watch Negative. The total include $4.2 billion of SF CDO liabilities previously placed on, and remaining on Rating Watch Negative. Fitch expects to resolve these rating actions within the next 30 days.
A further breakdown of Fitch's rating actions by current rating category is as follows:
--Current Rating 'AAA';
--$Amount on Rating Watch Negative $23.9 billion;
--Affected par proportion 8.93%;
--Affected deals* 83.
--Current Rating 'AA';
--$Amount on Rating Watch Negative $5.4 billion;
--Affected par proportion 41.61%;
--Affected deals* 100.
--Current Rating 'A';
--$Amount on Rating Watch Negative $3.5 billion;
--Affected par proportion 32.02%;
--Affected deals* 102.
--Current Rating 'BBB' or lower;
--$Amount on Rating Watch Negative $4 billion;
--Affected par proportion 40.56%;
--Affected deals* 105.
*there is significant overlap in these figures with many transactions containing multiple tranches on Rating Watch Negative.
Of the $23.9 billion of AAA rated securities on Rating Watch Negative, approximately two-thirds ($16 billion) represent 'AAA' rated tranches of mezzanine subprime deals, and CDO-squareds containing these tranches. The ratings from these deals are expected to suffer the most severe downgrades. While a full analysis remains to be completed, preliminary indications are that a three-to-four rating category average downgrade is to be expected for most of this group, with the revised ratings in the range of 'BBB' to 'BB-'.
The remaining $7.8 billion of 'AAA' rated notes on Rating Watch Negative are from high grade subprime RMBS, prime/Alt-A SF CDOs, and synthetic SF CDOs of all types. The magnitude of downgrade for these deals is expected to be less severe, averaging one-to-two categories with revised ratings ranging from 'AA' to 'A-'.
The ratings subject to Rating Watch Negative from classes currently carrying ratings of other investment-grade categories ('AA', 'A', and 'BBB') are expected to suffer downgrades to below investment grade.
On Oct. 30 2007, Fitch will publish a special report and host a teleconference which will describe the affected classes in the context of the overall portfolio of SF CDOs and categorize the transactions in terms of the characteristics most likely to influence rating performance. For each category, the affected debt and range of potential rating action will be identified. The report and teleconference will also outline the methodology which will be used for resolution of the Rating Watch Negative status, and identify the timeline for resolution.
The methodology to resolve these Rating Watch Negative actions will follow the framework of Fitch's established CDO rating methodology. Fitch is currently in the latter stages of a formal review and revision of the key VECTOR model assumptions used in its SF CDO rating methodology. This review aims to address the performance concerns of the sector, including:
--Heightened default expectations of US subprime RMBS, in particular recent vintages;
--Reduced prospect for recoveries on RMBS securities which have migrated to below investment-grade; and
--Increased propensity for credit co-movement.
The revised methodology also aims to provide the most prospective view of SF CDO credit by identifying the most accurate and timely probability of default estimates for the underlying assets. The methodology will be implemented for the resolution of the current Rating Watch Negative actions, and will be announced next week, concurrent with the first set of downgrades.
The primary drivers of the current Rating Watch Negative actions are the continued credit deterioration of underlying U.S. subprime RMBS and SF CDOs, as well as Fitch's expectation of further credit deterioration with respect to 2007 vintage U.S. subprime RMBS. SF CDOs were identified as Rating Watch Negative candidates on the basis of exposure to tranches of 2005-2007 vintage U.S. subprime RMBS which had migrated to a below-investment grade category. In the case of U.S. subprime RMBS issued in the second half of 2006 and the first half of 2007, as well as for SF CDO-squareds, exposure to low-investment grade categories was also considered, in order to reflect Fitch's increased loss expectations with respect to collateral originated during this time period.
For the purposes of Fitch's analysis of collateral underlying SF CDOs, the lowest rating assigned by Standard and Poor's or Moody's was applied in instances where Fitch did not explicitly rate the security, or such other rating was the most recently updated. Given the rapidly evolving credit profile of U.S. subprime RMBS collateral Fitch believes it is prudent to consider the recentness of RMBS rating actions in order to arrive at the most prospective view of SF CDO portfolio credit quality.
A spreadsheet reflecting the complete list of these, and all previous Fitch rating actions with respect to SF CDOs, is available for download at www.fitchratings.com/subprime.