In general we consider that corporate and sovereign ratings by the principal credit rating agencies (“CRAs”) have worked well. It is important not to weaken this ratings sector in responding to issues arising in other ratings sectors.
We consider that a simple suffix indicating a structured finance rating is desirable. The function of credit ratings is to provide information about the opinion of the CRA about the rated obligations. The clearer the information, at reasonable cost, the more valuable the communication becomes.
It is important, therefore, that any rating scale used is not over-complicated and is both clear and widely understood. An individual rating of an instrument/issuer has to be seen in two contexts:
The traditional vertical relationships in default probability indications, with their minor variations (AAA, Aaa, etc.), are quite well known and it would be unwelcome if this were to be changed.
Comparing ratings between risk types is more dangerous territory. CRAs necessarily use different methodologies in rating different types of instruments/issuers and in subsequent monitoring. Here, this may mean that that a rating of a structured product can be qualitatively different from that of a corporate or sovereign security. If it is not obvious, this may be deduced, from CRAs’ methodology descriptions.
Certain CRAs in rating money market funds1 draw attention to the different methodology in rating and frequency and mode of monitoring by using a suffix letter – as AAAm, etc. – and this is very effective. We think that this provides a good model for structured credits.
So, the CRAs should consider appending a simple suffix for structured finance ratings, e.g. AAAsf, to guide investors and other market participants towards referring to the specific approach taken in evaluating the particular type of structured finance.
