by Tanta on 8/01/2007 04:58:00 PM

Fitch downgraded a passel of subprime tranches today, which wasn't much of a surprise: these deals were on the Watch List announced in mid-July. The originators were mostly the usual suspects (Fremont, New Century, First Franklin, WMC). However, Fitch has started supplying some more information in its ratings announcements, to coincide with its updated surveillance methodology. I thought this bit was interesting (enough that I copied it into Excel so that the columns would display properly, you're welcome):

"BL" is "Break Loss," or the percentage loss the security could suffer before a write-down occurred for the tranche in question. So, for the average of all of the securities Fitch took rating action on today, the deal would have to take 37.75% in cumulative losses before a principal loss is taken by the AAA tranches. The BL takes into account subordination, overcollateralization, excess spread, the timing of actual and expected losses, prepayment speeds, and interest rate assumptions.

"LCR" is "Loss Coverage Ratio," or the BL divided by the expected lifetime losses for a given security. The Benchmark LCR here is specifically for seasoned securities (it is not identical to the benchmarks for new issues as it takes into account prepayments of the higher-rated classes). The benchmark LCR is the major factor in determining affirmation or downgrade of a given class.

Looking at just these averages, I'd be inclined to think that some of the affirmations just squeaked by in the B-rated tranches.