Fitch Ratings has entered into a long-term consulting agreement with Gifford Fong Associates (GFA) to develop new rating methodologies for credit structured finance and risk management. The partnership comes in response to the waning credit environment of the last 18 months and as Fitch aims to increase its value and recognition in the ratings market, according to Gloria Aviotti, group managing director at Fitch.
With GFA, Fitch intends to undertake several projects addressing quantitative credit risk analysis and credit risk metrics, as well as develop new ratings methodologies. The projects being implemented are in response to Fitch's general feedback from investors voicing a need for the service to reassess and respond to today's stressed credit market. The feedback called for ratings agencies to offer "lessons learned" from the ailing market conditions, Aviotti explained. "We've been challenged," she added, noting that ratings are an evolving process and it is Fitch's job to evaluate the changing situations within the market.
The first slated project is a comprehensive evaluation of global CDO analytics. The CDO market has been greatly impacted by the weak credit environment, with extreme levels of corporate defaults, low recoveries and structural limitations. All of that calls for new analytics on portfolio risk, Aviotti said. She added that the CDO market was a priority in Fitch's project plans because of the market's extreme impact on the sector. Improvements may include enhanced modeling of default probabilities, analytics of correlation among defaults, integration of interest rate and credit risk and a more granular calculation of recovery rates. Projects after the CDO concentration may include developing simulation methodologies for market value structure analysis, as well as projects in other areas of credit risk.