Responding to calls from various regulators for rating agencies to be more transparent in their practices, Fitch Ratings is publishing new rating criteria for all credits within public finance.
The updated criteria contain more detail than previous releases but the rating process itself has not changed.
“This is just criteria that are being updated in accordance with our analytic policies and there’s nothing that’s blazing new trails or earth-shattering in the reports. It’s just tweaking certain items and variables,” said Fitch analyst Douglas J. Kilcommons.
Fitch began releasing the updates last week and all of them — about a dozen in public finance — should be published by the end of this week, spokespeople at the agency said.
Two kinds of reports are being updated — master criteria reports, which deal with broad categories such as revenue-supported credits, and sector-specific reports, such as those released yesterday on higher education or nonprofit credits.
The criteria are based on all the factors one would expect to find. Fitch looks at how effective governance and management have been in the past, what the business strategy is going forward, and what operational structure the entity uses to carry out its goals. The agency analyzes capital planning capacities and regulatory issues, compares the issuers with its competitors, and profiles the rationale to issue debt.
The new criteria are not a reaction to specific legislation but rather stem from conversations held with regulators in Europe as well as the Securities and Exchange Commission, according to Eric Friedland, managing director and group credit officer at Fitch.
“Some of our criteria pieces may have been outdated or they may not have addressed every aspect of how we analyzed a bond, and that’s the goal of these new pieces,” he said. “The gain is that an investor can pick up one of these criteria pieces and be able to understand fully how it is we get to a certain rating.”
He added: “We don’t want our process to be a mystery, and neither do the regulatory agencies. It’s all in the name of transparency so that it’s not a black box and people understand how it is that we look at things.”
