The latest rating agency to join in the recent downgrade frenzy, Fitch Ratings said yesterday that 19 different CDOs have been put on negative ratings watch, and that the agency is revising its rating criteria for CDO analysis. From the press release:
Fitch Ratings has placed 33 classes from 19 structured finance (SF) CDOs on Rating Watch Negative (RWN) for potential downgrades. Fitch also maintains RWN on eight classes of four SF CDOs which were placed on RWN June 22, 2007. These actions are a direct result of collateral deterioration, specifically subprime RMBS, whereby significant portions of the portfolio have been downgraded, placed on RWN or 'Under Analysis' by either Fitch, Moody's or S&P in recent weeks. Fitch rates approximately $54.4 billion notes from 160 U.S. mezzanine SF CDOs and approximately $39.6 billion notes from 41 U.S. high-grade SF CDOs. Today's actions, combined with the four CDOs place on RWN on June 22, 2007, affect approximately $803 million ... ... Fitch also revised its CDO rating methodology to reflect the increased default risk evidenced in U.S. subprime RMBS bonds issued since 2005. The higher delinquencies and losses being realized in the late 2005 and 2006 vintage subprime RMBS is a clear departure from the historical performance of earlier vintages for this asset class. The revised rating methodology modifies Fitch's CDO modeling assumptions by increasing the default probability by 25% for U.S. subprime RMBS bonds issued since 2005 ... Fitch recognizes the performance of recent vintage subprime RMBS transactions are experiencing extreme volatility and may further adjust these assumptions as appropriate in the future.
Only $803 million is at risk? That number seems really, really, really conservative to me, given that we're talking about mezzanine CDO universe in the US of over $50 billion in size. Have the risks to the CDO market been overplayed by the media -- or is Fitch being too cautious in its rating approach here? I won't be on the conference call, scheduled for next Wednesday, to discuss this -- but I hope at least one intrepid reporter is willing to ask the tough questions about this. (If any HW readers fit the bill, and I can think of at least three, I'd love an update next week after the call.)