Chapter 4
The Rating Agency Process and Legal Review
In this chapter we describe the process for the most important stage of the securitization transaction, that of arranging the credit rating agency review and the legal review. These two undertakings, which for the most part occur in parallel (the legal drafting process begins before the ratings review process), are also certainly the most fee-intensive part of the securitization proceedings.
Select Rating Agencies
The credit rating agencies are engaged by the issuer to assign ratings to the issued bonds, in order to provide investors with an indication of the relative creditworthiness of the bonds (and so facilitate the sale). Ratings, however, are not intended to be a prediction of default or loss.
Standard & Poor's and Fitch generally assign a rating as to the likelihood of default or first dollar of loss; that is, a shortfall of even $1.00 in repayment of the bond is considered a default. Moody's, however, assigns their ratings based on the concept of expected loss. They state that “Expected loss is a function of the probability of default and the expected severity of loss given default.” The rating is determined by comparing the expected loss to an idealized loss table of expected loss by maturity published by Moody's.
In terms of process, the issuer and arranger of the transaction will begin discussion with the rating ...
