Fitch Ratings
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Fitch's ratings and research products and services offer the debt capital markets an opinion on the relative ability of an entity or a transaction to meet financial commitments, such as interest payment, repayment of principal, insurance claims or counterparty obligations. Fitch's credit ratings are used by investors worldwide as an indication of the likelihood of receiving their money back in accordance with the terms on which they invested.
The global depth, breadth, and analytical rigor of Fitch's ratings coverage has led to growing institutional acceptance. The firm's ratings are integrated into the rating methodologies of important fixed income indices in all major capital markets, including the global index families of Barclays Capital, Merrill Lynch, iBoxx and others. Most major investors have incorporated Fitch's ratings into their investment guidelines, and regulatory authorities and other market participants around the world also utilize the firm's ratings.
In addition to ratings, Fitch offers fixed income research, analytics, data, and pricing, and valuation services under the Fitch Solutions brand.
SIGNIFICANT EVENTS
The current credit situation began in the middle of calendar 2007 as a high degree of uncertainty and volatility developed in the global credit markets. Historically low interest rates, increasing demand for risky and more complex assets, and lax underwriting standards contributed to the current crisis. As the US housing market began to soften, home prices declined and mortgage defaults rose. These events initially impacted the performance of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO) backed by subprime collateral. However, the contagion effects of this subprime fallout subsequently spread to other asset classes.
Over the course of 2008, there has been a dramatic thinning in trading for securitized instruments, particularly mortgage-related, and new issuance activity has slowed significantly. Demand for complex assets has fallen off and increased volatility and widening spreads have been seen across all asset classes.
The ongoing deleveraging process is dramatically pressuring markets and prices. Deleveraging is reducing liquidity and contributing to price volatility - both for individual securities and for the institutions that own or insure them. Derivative exposure to these distressed assets is further magnifying the turmoil in the financial markets.
The institutional impact of these events has ranged from large scale write-offs of mortgage-related assets to major consolidation within the financial services industry. In September 2008, a coordinated response by governments around the world was launched to shore up conditions in the debt capital markets.
As these unprecedented conditions developed, Fitch remained focused on ensuring the quality, appropriateness, and transparency of its credit ratings and research. Fitch conducted extensive rating reviews and deterministic stress analyses, updated methodologies and models, and published timely and relevant research. Fitch introduced additional analytical tools to help address many of the risk elements being considered in the marketplace. These tools have included "rating outlook" and "under analysis" designations for selected structured finance sectors, "what-if" analyses, and user-customizable models.
A number of changes were also made within the organization to align resources with the current market conditions and associated initiatives. Such changes included the rotation of senior managers across business lines and the introduction of Chief Credit Officers and Portfolio Risk officers to the Corporates/Financial Institutions and Structured Finance areas, respectively. Fitch also took actions which further separated analytical and commercial activities.
Fitch has been engaged in active and constructive dialogues with policy makers, regulators and market participants. Fitch continues to review and respond to proposed modifications of policies and regulatory frameworks that strengthen confidence in the credit rating agencies and the debt capital markets.
In addition to addressing the near-term challenges, Fitch also continued its commitment to the development of local capital markets around the world. In 2008, Fitch increased its majority stake in Korea Ratings and acquired a minority interest in China Liahne Credit Rating.
Fitch Solutions
Fitch Solutions focuses on delivering fixed-income products and services to the capital market. Its product offerings include Fitch Ratings' research delivery, risk and performance analytics, surveillance tools, structured finance workflow solutions, and pricing and valuation services. The division's service offerings include Fitch Training, a specialist training firm for financial professionals, and Advisory Services, which provide customized consulting to help clients better understand their risk.
FINANCIAL REVIEW
Fitch Ratings generates revenue by assigning ratings to new debt issues and by monitoring previously rated fixed-income obligations. Fitch Ratings, excluding Korea Ratings, generated revenue of $672.8 million during the 2008 fiscal year, compared with $827.4 million for fiscal 2007. Including Korea Ratings, Fitch Ratings' revenue amounted to $727 million versus $853 million for the prior year, representing a 14.8% decrease on a reported basis in dollars.
After translation into euros, its contribution to consolidated revenue came to €484 million versus €642.6 million for the prior year, a decline of 24.7% on a reported basis and 20.3% like-for-like.
Recurring operating profit, including Korea Ratings, was $267.6 million, a 4.4% increase on a reported basis in dollars from $256.2 million for the previous period. Translated into euros, recurring operating profit was down 7.7% on a reported basis and 3.1% like-for-like. On a like-for-like basis, recurring operating margin in fiscal 2008 improved to 36.5% from 30% for the prior year.
MARKET SHARE AND COMPETITION (Source: Fitch Ratings)
Fitch Ratings competes with other credit rating agencies, on a local and global scale, along with investment banks, brokerage houses, asset managers, and independent research firms that offer credit research, analysis, and opinions. Its largest competitors in the global credit rating business are Moody's Investor Service (Moody's) and Standard & Poor's Ratings Services (S&P), a division of The McGraw-Hill Companies, Inc. The US Securities and Exchange Commission designated 10 firms, including Fitch, Moody's and S&P, as Nationally Recognized Statistical Rating Organizations ("NRSROs").
Based on global debt issuance of approximately $4.3 trillion for the twelve months ended September 30, 2008, Fitch Ratings' market share, measured in terms of the dollar issuance volume, stood at an estimated 75%. The table below lists global market share for the individual sectors where Fitch is an active player.
Non-Financial Corporates 80%
Financial Institutions 90%
Structured Finance 59%
US Public Finance 61%
Sovereigns 92%
Total 75%
Fitch Ratings' Scope:
• 5,990 financial institutions ratings, including 3,212 banks and 2,294 insurance companies
• 1,724 corporate ratings
• 49,297 US municipal issues
• 289 sovereign and sub-sovereign ratings
• 7,262 US structured finance issues
• 1,575 European structured finance issues
• 914 structured finance issues in the Asia-Pacific region