OREANDA-NEWS. June 30, 2015. Following a request for market feedback in April, Fitch Ratings has decided to adopt disclosures highlighting rating agency removal language (RRL) in its rating communications for new covered bond (CVB) programmes and structured finance (SF) transactions. These disclosures will show where RRL is present and what its implications could be for contractual obligations, credit protection and ratings if exercised.

In its request for feedback, Fitch had previously considered limiting ratings (or adjusting Discontinuity caps (D-Caps) for covered bonds) where RRL is present in documentation and where the rating opinion depends on contractual provisions relating to Fitch's analytical approach.

Investor feedback suggested that decisions on rating agency removal may not be significantly different in a situation where investors are actively consulted compared with one where investors are not. This feedback related to transactions or programmes with three ratings, which are mostly where RRL has been seen so far.

On this basis, there is no reason to believe that rating migration for programmes and transactions with RRL would be greater than for others without RRL. This addresses the key risk cited by Fitch in its request for comment, which led to the agency considering rating limitations in relation to RRL. Nevertheless, certain investors did express their disapproval of RRL with some saying they would prefer negative consent provisions.

Use of RRL has so far been limited to a few large SF structures (such as master trusts) and CVB programmes, mostly with three ratings that involve numerous issuance and note classes, where active investor consultation would be burdensome for the issuer.

Fitch will continue to monitor future use of RRL and whether such language starts to extend beyond its current restricted use into simpler transactions or programmes or more with fewer ratings. Signs of this could give us cause to revisit this topic in the future, given that fewer ratings mean an investor decision on rating agency removal may differ to one taken by the issuer, for example, given the specifics of their investment mandates. As a result, this could result in different decisions to remove rating-related contractual provisions that support the rating opinion.

The feedback received and how this was taken into account is detailed in a report published by Fitch today "Feedback Report: Rating Impact of Rating Agency Removal".