Thursday, May 15, 2008


Moody's Investors Service said today that it would be introducing two supplemental measures to its structured finance ratings to enhance their transparency and information content. The first, the Assumption Volatility Score, will assess potential rating volatility based on the uncertainty of rating model assumptions. The second, Loss Sensitivity, will capture a rating's sensitivity to a change in the expected loss rate on the collateral pool backing the security.

"These two measures will provide more clarity about the credit characteristics of structured finance ratings," said Michel Madelain, Moody's Chief Operating Officer. "We believe they will provide investors greater insights into the risks of structured finance products."

Moody's developed the measures working from responses to a Call for Comment issued in February, "Should Moody's Consider Differentiating Structured Finance and Corporate Ratings?," as well as from additional market discussions. Moody's received over 200 responses, including from investors that together held in excess of U.S. $9 trillion in fixed income securities.
In their responses, market participants overwhelmingly rejected the idea of a separate rating scale for structured finance securities. However, they also voiced a desire for more information from Moody's on key components of structured finance risk. These included the degree of certainty in the assumptions behind a structured finance rating and the sensitivity of a rating to losses in the underlying loan pools.

Moody's expects to introduce the measures gradually at the end of the current quarter, using them first on some new securitizations of vehicle-backed assets. Only new issuance will receive the measures. Moody's also remains receptive to market comments on them.

The Assumption Volatility Score, or V score, will rank transactions on a one-to-five scale by the potential for significant changes owing to uncertainty around the assumptions and the modeling that underlie the ratings. A single V score will apply across tranches to an entire transaction. The V score will be the composite score on factors including historical performance, data adequacy, the complexity and market value sensitivity of a transaction, and governance.

Loss Sensitivities will measure the number of rating notches Moody's would expect a security to be downgraded should the expected loss rate on its underlying collateral pool increase to a highly stressed level. Specifically, the measure looks at the change in ratings that would follow the expected loss rate on the transaction's underlying collateral pool increasing to, for example, a 95% loss level stress, that is to a level expected to have a one-in-twenty chance of occurring.

The measures are detailed in the special report "Introducing Assumption Volatility Scores and Loss Sensitivities for Structured Finance Securities," as are the results of the Moody's survey on potential rating modifications.

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