(The following statement was released by the rating agency)
Jan 25 - Fitch Ratings has reviewed its criteria for stressing interest rate risk in covered bonds and structured finance transactions and has kept the core principles of the criteria unchanged. In particular, the agency changed the speed with which rates increase from current levels to long-term plateaus, however the levels of the plateaus themselves remain unchanged. The update was conducted in light of the continuing historically low interest rate environment in several developed economies. Fitch does not expect any rating changes to result from the implementation of the update.
The criteria outline Fitch’s methodology for analysing the vulnerability of structured finance transactions and covered bonds to interest rate changes. The framework combines both short-term and long-term considerations and provides for upwards and downwards stressed interest rate curves for different rating stresses.
The path to the long-term plateau assumption for stresses applicable to Euribor, US dollar Libor and sterling Libor has been modified to reflect their low and stable levels since mid-2009, as well as Fitch’s view that a significant deviation from the current path in 2013-2014 is unlikely. Specifically, the path to plateau has been made relatively less steep at all rating levels below ‘AAAsf’ compared with the criteria published in March 2012. The relative change is more significant at the ‘Bsf’ category than at the ‘AAsf’ category.
“The decision to keep the ‘AAAsf’ stresses unaltered reflects the uncertain outcome and timing of changing course on current monetary policies in the event of a sustained economic recovery,” says Michele Cuneo, Senior Director at Fitch. “Although the current low and stable interest rate environment represents a significant deviation from historical trends, the agency believes that the global economy is ultimately on a path back to an economic environment consistent with the existing criteria assumptions,” adds Cuneo.
Fitch has also completed an updated review of the interest rate stresses and calibration parameters applicable to each short-term market interest rate (i.e. Libor or currency-specific equivalents), which are published in the spreadsheet “Fitch’s Interest Rate Stress Assumptions for Structured Finance” dated 25 January 2013 at www.fitchratings.com. The process included an analysis of historical rate movements, a review of the economic outlook and monetary policy regimes of each country, and an evaluation of the resultant levels of stress produced by applying the interest rate criteria.
The changes made do not apply to revolving transactions, given the uncertainty regarding the interest rate environment that would exist at the end of the revolving period.
The updated criteria report “Criteria for Interest Rate Stresses in Structured Finance Transactions” and accompanying spreadsheet are available at www.fitchratings.com.
Link to Fitch Ratings’ Report: Criteria for Interest Rate Stresses in Structured Finance Transactions