Fitch Ratings announced that it is considering significant changes to its rating methodology for corporate collateralized debt obligations, which could lead to some substantial downgrades for existing portfolios.

The rating agency has published an exposure draft of its proposed methodology revisions, along with a beta model, and it’s seeking market feedback regarding the changes. Fitch anticipates that the final criteria will be issued no later than March 31, at which point the agency will recommence issuing ratings for corporate CDOs.

Following issuance of final criteria, Fitch will conduct a review of its existing portfolio of CDOs and take rating actions as necessary based upon the revised criteria.

Static synthetic CDOs are expected to be most affected by the revised criteria, with an average expected downgrade of five notches. This is expected to impact numerous tranches currently carrying a ‘AAA’ rating.

The magnitude of downgrades for cash-flow CDOs holding high-yield assets is expected to be less severe, with the majority of senior classes expected to be affirmed. Junior tranches are more susceptible to downgrades, and these are expected to range from one to three notches.

“With the structured credit markets under unprecedented stress, Fitch wanted to proactively challenge existing CDO rating assumptions, learning from areas where underperformance has already materialized,” says managing director and head of Global Structured Credit, John Olert.

“Fitch’s proposed revisions to its corporate CDO methodology are designed to provide an updated, more forward-looking view of corporate default and loss experience. The intention is to produce CDO ratings that perform similarly in terms of default risk and ratings migration with the market’s expectation for other asset classes,” he added.