Credit Ratings for Structured Products: A Review of Analytical Methodologies, Credit Assessment Accuracy, and Issuer Selectivity

06 November 2003
By Dr. Andrew Carron with former NERA Senior Consultant Tsvetan Beloreshki and former Special Consultant Dr. Phoebus Dhrymes; NERA Senior Analyst Michael Gill and Jonathan Falk also contributed to this study

This report summarizes an independent NERA study comparing the performance of structured finance products rated by Moody's Investors Service, Standard and Poor's and Fitch Ratings. Led by NERA President Dr. Andrew S. Carron, former NERA Senior Consultant Tsvetan N. Beloreshki, and Columbia University Professor of Economics Dr. Phoebus J. Dhrymes, the study evaluates the systematic differences created through the rating processes employed by the major credit rating agencies. The study was conducted on behalf of Moody's Investors Service.

"Credit Ratings for Structured Products" is the first study of its kind to have collected and analyzed data provided by all three principal credit rating agencies. The impetus for the study is the market debate over the treatment by individual agencies of securities included in a rated structured transaction -- in particular, the technique known as "notching." Notching refers to the industry practice whereby one agency adjusts ratings of bonds within a structured finance instrument that may have been initially rated by a different agency. Ratings in these instances are frequently adjusted downward based on uncertainty over perceived differences in monitoring practices.

The intent of the NERA study is to shed new light on perceived and actual differences in such monitoring practices at a time when rating agencies are increasingly being asked to rate structured finance products. Rather than argue for a single interpretation, the primary goal of the study is to present the facts, the range of possible interpretations, and the available evidence that can be used to differentiate among the potential interpretations.

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