01 March 2006

AMF second report on Credit Rating Agencies

AMF, the French securities regulator published its second report on Credit Rating Agencies examining the changes that have occurred to the domestic and international environment in which credit rating agencies (CRAs) operate. Alongside its report, the AMF is publishing two studies.

The first study on securitisation concludes that Investors rely on ratings to different degrees depending on their profile. As a rule, the more they invest in senior tranches, the more they depend on the rating as a substitute for an internal credit analysis. Some asset managers are starting to include details in their fund documentation of the methodological limitations of ratings, especially with respect to CDOs.

The relationship between rating and return for securitised products is interpreted in different ways on the market. At equal ratings, spreads on CDOs and the standard deviation of returns for a given tranche are, on average, higher than those for ordinary corporate bonds. This becomes increasingly true at the lower ratings. These findings are doubtless attributable to the different methodologies used for corporate debt ratings, which are based on an intrinsic economic analysis of the company, and SF ratings, which are based on a statistical analysis that determines the average estimated loss at a given confidence interval. There is reason to wonder whether investors making their asset allocations take full account of this structural difference between corporate and SF ratings, and notably of the fact that SF ratings do not necessarily include the dispersion of risk around the mean.

The second study on the impact of ratings analysed the European ABS market and, more specifically, the impact of credit rating changes on various measurements of the performance of such bonds. It concludes that overall, the strong reactions that have been identified tend to support the hypothesis that credit rating agencies play an even greater role for ABS, which are bonds based on more complex and/or less transparent underlying assets.

Press release
Annual report on the role of rating agencies
Study on Securisation
Study on impact of ratings

© AMF - Autorité des Marchés Financiers