A difference in ratings methodologies between Standard & Poor's and Fitch Ratings on the one hand and Moody's Investors Service on the other, may give the latter an edge with the latest trend in European structured credit. Moody's expected-loss model allows it to give investment-grade ratings to collateralized debt obligation equity tranches, if they are structured with a reserve account to absorb losses, while S&P's and Fitch's first-loss models do not.
Rated equity appeals to traditional mezzanine investors, such as insurance companies and pension funds, which prefer rated tranches, and to bank prop desks, which are required to invest in rated tranches. Buy- and sell-siders said nearly every bank in Europe is trying to structure these deals and that S&P and Fitch risk losing market share if they can't adapt their methods. "S&P has always dominated market share and they'll be keen to hold onto this," said one structurer. "They must come up with a way to rate CDO equity if they want to stay in the game."
At least one deal has priced (DW, 8/25)--it was rated by Moody's--and about five reportedly are in the works. Katrien Van Acoleyen, structured finance analyst at S&P in London, said she has not been asked to rate any such deals and could not comment on deals she has not seen. Officials at Fitch could not be reached for comment by press time.
