OREANDA-NEWS. Fitch Ratings has updated its criteria for collateralised debt obligations backed by loans to small - and medium-sized enterprises (SMEs). The report replaces the existing "Criteria for Rating Granular Corporate Balance-Sheet Securitisations (SME CLOs)", dated 22 August 2016. The updated assumptions are not expected to have an impact on existing CLOs.

The updated report explains Fitch's approach to single-sector portfolios in SME CLOs. Fitch will develop bespoke correlation assumptions for these transactions based on historical data covering at least one economic cycle and including a period of stress.

The agency has also outlined its treatment of subsidised borrowers in SME CLO portfolios. Fitch defines subsidised borrowers as those whose business model would no longer be viable following a withdrawal of the subsidy. Fitch's subsidy analysis focuses on the Subsidy Support Threshold (SST), which is the highest rating level at which Fitch expects subsidies to continue without negatively impacting the viability of the subsidised borrowers' business model. Fitch assumes that at rating levels above the SST, all subsidised borrowers default due to the loss of subsidy funds.

Furthermore, the report clarifies the treatment of bullet loans maturing in a short period of time. Fitch will apply the treatment applicable to revolving credit lines for concentrations of short-dated bullet loans, as it considers the refinancing risk associated with these loans to be similar. The feasibility of refinancing for long-dated bullet loans is more uncertain and Fitch will therefore cap the ratings of transactions with concentrations of long-dated bullet loans at the Long-Term Issuer Default Rating of the originating bank.

The updated report also contains additional details on the committee treatment of model-implied ratings, including specific examples of when the committee may assign ratings which differ from model-implied ratings.