Structured Finance Rating Transitions

Abstract

Structured finance ratings have been less volatile than corporate ratings overall, even though the average number of notches changed per rating action has historically been higher in structured finance. Average annual and multiyear migration rates from higher rating categories to ratings of Caa or below are similar in the two sectors. Average annual upgrade and downgrade rates have been roughly equal for structured finance securities; the corporate sector, average annual downgrade rates have historically exceeded upgrade rates. Both structured finance and corporate ratings experience strong positive path-dependence, or rating change momentum. Some structured finance sectors such as CMBS and RMBS have had higher average upgrade rates and lower average downgrade rates than other sectors; CDOs and ABS have had higher downgrade rates and lower upgrade rates. Many factors may contribute to the observed differences between structured finance and corporate rating transition experience, including differences in the sector rating distributions; macroeconomic drivers of risk in the corporate sector and in the consumer and mortgage finance sectors; the nature of pooled and idiosyncratic risks; and the concentration risk associated with some originators and servicers.