OREANDA-NEWS. April 14, 2015. Fitch Ratings has published a request for comment as to whether the highest ratings of 'AAA' ('AAAsf' for SF) should be achievable where rating agency removal language (RRL) is present and the rating opinion depends on related contractual provisions being followed.

RRL is where the issuer or sponsor can remove a rating agency and all contractual provisions relating to that agency from documentation without the explicit consent of bondholders, rather than comply with those provisions. RRL could particularly impact contractual remedies in relation to the credit profile of counterparties. The agency believes that rating migration could be more pronounced relative to other programmes and transactions if they are assigned the highest ratings.

"While at the time of issuance, it is by no means certain that the RRL would be exercised or that, if it were, it would be exercised to remove Fitch as one of the rating agencies, it is rendered more probable if, for example, Fitch should, at some point in the future, downgrade the counterparty to a lower level than the other rating agencies such that counterparty remedies are engaged," said Stuart Jennings, Group Credit Officer for Structured Finance (SF) and Covered Bonds (CVB) at Fitch. "Rating removal may therefore be more probable in a programme or transaction where RRL is present than in one where investors must be consulted and would have the opportunity to assess the specific circumstances giving rise to the proposed rating agency removal. Upon such contractual provisions being removed, Fitch would expect to downgrade its ratings."

Fitch would propose to reflect RRL in its ratings, if the risk that the option will be exercised, in order to avoid compliance with certain provisions of the transaction documents, is viewed as material. For SF transactions or CVB programmes with RRL, Fitch would assess in its rating analysis the practical ability of issuers and sponsors to exercise the RRL, as well as the likelihood of RRL being exercised.

Where the agency believes the RRL could be exercised and has a higher likelihood to be exercised, it will assume this occurs with respect to counterparty or other contractual provisions on which Fitch relies in its analysis. In the case of new rating proposals with RRL, this could see ratings capped or, for ratings of existing SF transactions or CB programmes where such RRL is already present, then ratings could be downgraded.

While RRL is present in a small number of CB programmes and SF transactions that Fitch rates, the agency currently assesses these programmes or transactions as having a low practical ability or likelihood of RRL being exercised and therefore expects no rating action as a result. However, it is possible that new issuance from these programmes or trusts would become subject to the rating limitations.

Fitch has published a special report, "Rating Impact of Rating Agency Removal", requesting comment on this topic and how the agency would propose to address it in its rating analysis. The report requests readers' views as to whether such RRL should limit achievable ratings and poses a number of questions on which Fitch is seeking feedback. Responses can be sent to sffeedback@fitchratings.com by 15th May 2015.