Fitch Ratings is planning to change its methodology for rating collateralized debt obligations, to better account for how collateral managers affect the performance of these transactions, according to individuals at the firm. The planned alteration comes as managed CDOs now make up a majority of the market's new deals, whereas static pool transactions used to dominate. Fitch is expected to announce the changes later this month.
The change is necessary because managers of some deals can turn over up to 25% of a portfolio each year, and their adeptness in doing so is becoming more relevant to the deal's overall performance. "As it is now, there's no way to get comfortable with the change in a portfolio over time," explains one analyst. Last autumn, the rating agency launched a separate group to evaluate CDO managers, the quantitative rankings from which will be incorporated into the CDO's rating. The asset manager group ranks buy-siders on characteristics such as experience and financial condition.
To be sure, CDO investors have always stressed the manager's importance, but Fitch analysts say this will mark the first time that ability is quantified and incorporated into a deal's overall ranking. Currently, the rating agency takes CDO managers into account on a qualitative basis when ranking an individual transaction. Standard & Poor's has a more established CDO manager ranking process, but it is independent of deal ratings. Moody's Investors Service does not rate CDO managers.