Further transparency:
Fitch publishes detailed report on ratings
FITCH RATINGS is co- mmitted to providing the world’s securities
markets with independent, timely and forward looking opinions on credit
risk via prospective ratings and in-depth research and analysis.
Over the past few months, discussions with many market participants
including investors, issuers and regulators have revealed a broad
understanding and support of Fitch’s approach to assigning ratings on
the ‘AAA’ scale.
However, some market participants have requested further transparency
and more detail ‘behind the ratings’. In response, Fitch has published a
report titled; “What Credit Ratings Mean”.
“We get regular questions regarding the different dimensions of risk
communicated by our ratings,” said report co-author, Richard Hunter.
Regional Credit Officer at Fitch. “We wanted to pull these together
to help people understand the thought process behind the ratings and the
underlying strengths of the rating scale, as well as the limitations
built into what the ratings can express”.
The study covers a number of topical issues, including the
comparability of ratings across sectors, the degree to which loss
severity is incorporated in ratings and the time horizons which apply to
‘through-the-cycle’ ratings.
The report also summarises the impact of even risk on Fitch’s credit
ratings, from was to changes in tax law.
“We feel it’s important for users to understand the assumptions we
use when assigning ratings,” Senior Director and Head of Rating Policy
Sharon Raj, said.
“Credit ratings have never explicitly spoken to pricing of an
instrument, nor to liquidity of the instrument, but the market has
generally formed its own expectations regarding these factors based on
historical ‘AAA’ rated assets.
The expectation that a ‘AAA’ rated security would always be highly
liquid and price at a very fine level - assumptions ‘beyond the rating’
- worked well for treasury bills and very law risk institutions, but
will increasingly be challenged as the universe of very low-default
instruments expands.”
Other areas reviewed in the report include local currency ratings,
the assignment of rating watches and rating outlooks and the
relationship between rating levels and default statistics. |