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| Richard Hunter |
Fitch Ratings plans to change its ratings scale to better reflect recovery rates, according to Richard Hunter, managing director in credit policy in London. Currently, it assigns ratings based largely on probability of default. "The idea is to clearly separate expected loss, which is what ratings are based on, into its component parts of default probability and recovery rate," said Hunter. The new ratings scale will be instituted across all corporate asset classes and regions by the middle of the year. Fitch will assign an issuer default rating (IDR) based on probability of default, which will replace the current long-term ratings on issuers. Meanwhile, securities will be assigned a probability of default rating and a recovery rating. Fitch is making the change because of several factors: debt offerings have become more complex, credit derivatives are being used more widely and banks are focusing on implementation of Basel II.
Fitch's default ratings currently incorporate differences in recovery rates between, say, unsecured and secured debt, but the differences are not quantified, Hunter said.
The rating agency is soliciting feedback on the proposed rating changes from issuers, arrangers and investors, and plans to roll out the new ratings by the second half of this year. Ratings on defaulted securities will be changed first, with Fitch's single-D ratings set to disappear.