Fitch hits back at Moody's in CDO ratings row

Rating agency Fitch moved to defend its standing in the collateralised debt obligation (CDO) rating market by slating the ‘notching’ practices used by rival rating agency Moody’s in a formal report yesterday.

Rating agencies developing an overall rating for a CDO often automatically adjust downward bond and loan ratings included in that CDO if the ratings were made by a rival agency – a process known as notching. Fitch, which appears to have directed most of its angst towards market leader Moody’s rather than Standard & Poor’s (S&P), said the practice is unfair as it devalues Fitch ratings and encourages CDO managers to pay for new ratings by Moody’s to avoid notching.

“In a recent report... Moody’s makes a great effort to convince the reader and hence the structured finance market that there are...‘fundamental difference in stated rating agency methodologies’,” Fitch said in its report, entitled 'Should Moody’s notch its own ratings?' “It seems that in putting this remarkably biased report together, Moody’s failed to examine its own record on CDOs in 2001,” Fitch alleged.

In yesterday’s report, Fitch calculated that Moody’s downgraded 12.7% of its rated CDOs in 2001, compared with 8.8% for Fitch and 8.2% for S&P.

“Moody’s conveniently missed the point in its ‘study’. The agency would like the reader to conclude that its rating process and methodology is far superior, when in reality they experienced similar, if not deeper, deterioration on CDOs they rated,” Fitch argued.

Fitch said last week that structured finance ratings are “very similar” across the three major rating agencies as 95% of the time the raters issue equivalent ratings.

But Moody’s disagrees. Yvonne Fu, a senior vice-president at Moody’s in New York, said in late March that there is a “gap between Moody’s estimated ratings and other agencies’ ratings”, a finding backed up by a Credit Suisse First Boston report in December that concluded: “Differences in credit rating methodologies frequently lead to major differences in credit ratings given to CDOs by major rating agencies.”

The disagreement is not expected to die down, especially once New York-based economic consulting firm National Economic Research Associates (Nera) completes its own comparative study of structured finance ratings from the three rating agencies later this year. Moody's is sponsoring the study, but Nera insists the review will be conducted independently.