Fitch Updates Recovery Rating Criteria

Fitch Ratings has released updated rating methodology for its Structured Finance Recovery Ratings (RRs), which provide investors and other market participants with an indicator of Fitch's expected recovery on distressed or defaulted residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), collateralized debt obligations (CDOs) and asset-backed securities.

Initially launched as Distressed Recovery Ratings in April 2006, they were relaunched as Recovery Ratings as part of a ratings definition update by Fitch in February. Fitch now has in excess of 19,000 RRs, which operate on a RR1 (highest recovery) to RR6 (lowest recovery) scale and are a relative indicator of creditor recovery prospects on a given obligation within an issuers' capital structure in the event of a default.

"Investors recognize that while a structured finance bond may have a higher degree of default risk due to collateral deterioration, ongoing principal and interest payments can be valuable, particularly for senior bonds," says Fitch Group Managing Director and U.S. MBS group head Huxley Somerville.

The significant stress within the structured finance market, most notably in the U.S. RMBS sector, has resulted in Fitch downgrading a large number of senior and subordinate securities to CCC and lower, reflecting a high probability of default.

However, despite the high likelihood of a dollar loss, ongoing principal and interest payments can result in a substantial recovery, Fitch reminds stakeholders. RRs indicate the expected level of recovery on a bond by comparing the present value of Fitch's expected future cashflows from the bond to the bond's outstanding principal balance.

Fitch plans to publish group specific RR criteria for ABS, CMBS, RMBS and structured credit in the coming weeks, and the agency is currently looking into enhancing its Web-based surveillance tools with respect to RRs to enable users to manipulate assumptions and run their own recovery analysis.

SOURCE: Fitch Ratings

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