The report, "Assumption Volatility Scores and Loss Sensitivities in the U.S. ABS Vehicle Sector", details the assignment of Assumption Volatility ("V") Scores and Loss Sensitivities to prototypical transactions in each vehicle ABS sub-sector, illustrating the new forms of risk measurement introduced by Moody's in May.
"These measures provide greater insight on potential factors that could lead to ratings volatility and the potential impact of changes in assumptions," says Moody's Managing Director Warren Kornfeld.
Moody's found that V Scores ranged from Low for prime auto loans to Medium for subprime auto loans, rental cars, dealer floorplan loans, and auto leases. Loss Sensitivities for the senior Aaa-rated tranches ranged from two to four notches; the Loss Sensitivities for subordinated tranches rated Aa and lower ranged from six to 11 notches.
Moody's will begin reporting transaction-specific V Scores and Loss Sensitivities in pre-sale reports, new issue reports and press releases for all new transactions in the U.S. vehicle ABS sector marketed on or after July 28, 2008. Moody's will also begin the process of rolling out similar reporting for new transactions in other global structured finance sectors over the remainder of 2008, following the publication of similar sector reports for each new asset class.
In May, Moody's proposed the two additional risk measures to enhance the transparency and information content of its structured finance ratings. Over the last two months Moody's reached out to market participants and incorporated feedback received in the development and application of the newly introduced risk measures.
"Market participants have responded quite favorably to the utility of these new measures and the greater transparency into our ratings that they provide," Kornfeld added. "We look forward to further market input as we continue to roll out, adjust and finalize our approach to these measures for the other structured finance asset classes globally."
Moody's V Scores measure a transaction's exposure to factors that contribute to uncertainty in estimating credit risk and could give rise to ratings volatility. V Scores rank transactions on a five point scale by the potential for significant rating changes owing to uncertainty around the assumptions and the related modeling that underlie the ratings.
Moody's Loss Sensitivities measure the number of notches that the rating on a Moody's-rated structured finance security would likely move downward if the loss expectations assumed for the transaction's underlying collateral pool were presumed to be substantially higher at issuance than those actually used to rate the transaction.
The new Moody's report is called "Assumption Volatility Scores and Loss Sensitivities in the U.S. ABS Vehicle Sector. The May 13th report that introduced the new risk measures is called "Introducing Assumption Volatility Scores and Loss Sensitivities for Structured Finance Securities." Both reports are available on Moodys.com.