Downgrade/upgrade ratio improved, Moody’s reports

The ratio of downgrades to upgrades declined sharply in 2003, although rating volatility was still above its long-term historical average, said rating agency Moody's Investors Service.

"Globally, out of a total universe of 18,947 ratings at the beginning of 2003, 1,279 ratings from 570 deals were downgraded, and 569 ratings from 216 deals were upgraded in 2003. This means that for every upgrade there were roughly two downgrades in 2003, compared to five downgrades for every upgrade in 2002," said Moody's analyst Jian Hu in the agency's annual study on structured finance rating changes.

The average number of total notches per year for each downgraded security in 2003 fell to 4.2 from 4.7 in 2002, while the average per year per upgraded security fell from 3.2 in 2002 to 2.6 in 2003. This compares to corporate finance averages of 1.7 per downgrade and 1.3 per upgrade.

Downgrades among asset-backed securities and collateralised debt obligations (CDO) accounted for 88% of all downgrades in 2003. The rate of downgrades in the CDO sector dropped to 17.9% from 25.1% in 2002, with an upgrade rate of 1.3%, up from 0.6% in 2002. Downgrades in arbitrage cashflow collateralised bond obligations and synthetic arbitrage deals comprised the overwhelming majority of all CDO downgrades in 2003.

In the US, the upgrade rate rose to 3.2% in 2003 from 1.1% in 2002, while the downgrade rate remained unchanged at 7%. In Europe, the upgrade rate fell to 2.7% from 3.0%, while the downgrade rate rose to 10.2% from 9.3%.