Fitch has published rating criteria for repackaged senior structured finance notes. A new report details the ratings agency's key considerations for securities and notes that not all resecuritisations will be eligible for higher ratings, if any ratings at all.

The agency's structured finance obligation rating considers the relative vulnerability of transactions to a default on principal or interest, as opposed to a transaction's expected loss. Therefore it is possible that although an underlying note is exposed to elevated default risk, the recovery rate will be high in the event of a default.

Institutions that have either ratings-based capital needs or investment guideline limitations above certain rating thresholds may decide to repackage the security into a first-loss tranche and a senior tranche. The likelihood of suffering a loss on the new senior tranche is then significantly reduced because of the additional subordination provided by the junior tranche. This means that Fitch may be able to assign a rating to the new senior tranche that is higher than that assigned to the original security.

When determining whether to assign ratings to repackaged structured finance notes Fitch will take several factors into account, including the seniority of the original note, the capital structure of the new transaction and the expected performance of the underlying assets. It currently has a moratorium on rating resecuritisations backed by transactions with US RMBS subprime, US Alt-A with overcollateralisation structures or other esoteric assets, due to continued performance volatility in these sectors.