Ratings

Under the proposal, when assigning and monitoring ratings, we would consider whether we believe an issuer or security has a high likelihood of experiencing unusually large adverse changes in credit quality under conditions of moderate stress (for example, recessions of moderate severity, such as the U.S. recessions of 1960 and 1991 and the European recession of 1991 or appropriate sector-specific stress scenarios). In such cases, we would assign the issuer or security a lower rating than we would have otherwise.

The table shows the maximum projected deterioration under moderate stress conditions that we would associate with each rating level for time horizons of one year and three years. For example, we would not assign a rating of 'AA' where we believe the rating would fall below 'A' within one year under moderate stress conditions. The proposed change is an extension of our previously announced initiative to include a what-if scenario analysis in rating reports.

Maximum Projected Deterioration Associated With Rating Levels For One-Year And Three-Year Horizons Under Moderate Stress Conditions
	AAA	AA	A	BBB	BB	B
One year	AA	A	BB	B	CCC	D
Three years	BBB	BB	B	CCC	D	D

These credit-quality transitions do not reflect our view of the expected degree of deterioration that rated issuers or securities could experience over the specified time horizons. Nor do they reflect the typical historical levels of deterioration among rated issuers and securities. In fact, instances of credit deterioration of this magnitude and speed have been uncommon. The proposal does not imply that we believe that issuers or securities should become—or are likely to become—less stable.

Rather, the values in the table express a theoretical outer bound for the projected credit deterioration of any given issuer or security under specific, hypothetical stress scenarios. Actual experience likely will vary from the hypothetical scenarios, so the universe of rated issuers and securities (as well as sub-populations of the full universe) likely will display actual degrees of deterioration greater than or less than those indicated in the table. For example, we would naturally expect relatively little credit deterioration during benign market conditions or during conditions of only mild or modest stress. Conversely, issuers and securities could suffer greater degrees of credit deterioration during periods of severe or extreme stress. In addition, specific business segments—such as housing, energy, retail, and transportation—could experience different degrees of stress over any given period.

We do not intend the proposed change to result in rating upgrades in sectors that have historically displayed above-average credit stability. Instead, we intend this proposal to function as a limiting factor on the ratings assigned to credits that we believe are vulnerable to exceptionally high instability.

The primary focus of the stability consideration is intended to be ordinary business risk rather than special types of risk, such as changes in laws, fraud, massive natural disasters, or corporate acquisitions.

The proposed change is asymmetric in that it focuses solely on credit deterioration rather than on credit improvement. There are two reasons for this approach. First, investors and creditors have expressed greater concern about deterioration than improvement. Second is the essential downside/upside asymmetry of the basic credit proposition.

We expect the proposed change would have very little, if any, effect on our ratings in the corporate and government segments of the capital markets. In those areas, it could affect issuers that have ratings-based trigger features in their obligations that accelerate the maturity of debt or that impose other onerous consequences under specified conditions. Likewise, the proposed change could affect companies engaged primarily in high-volatility business activities, such as energy trading.

We anticipate that the proposed change would have a more pronounced impact in certain areas of the structured finance segment, particularly on our ratings of derivative securities such as:

• Collateralized debt obligations of asset-backed securities (ABS CDOs).
• Constant-proportion debt obligations (CPDOs).
• Leveraged super-senior (LSS) structures.

Transactions and structures that create more significant cliff risks would likely experience the largest impact. The proposed change could result in downgrades to significant numbers of the securities listed above when we first implement the proposal.

If we adopt the proposed change, we intend to implement it over a period of roughly 180 days from the date on which we announce it. It would apply to ratings on all types of issuers and securities and to both new and existing ratings. The change could require modifications to the rating criteria for certain types of issuers or securities. We will continue to strive for general comparability of ratings across the universe of ratings at each point in time, but the proposed change may somewhat affect comparability of ratings before and after the change.

As a general matter, our ratings express our opinion of the creditworthiness of issuers and specific securities. However, the notion of creditworthiness has sometimes been interpreted differently in various market segments. In particular, certain areas of the structured finance segment have favored a narrow interpretation, essentially meaning "likelihood of default" without regard to other factors. We are proposing to move beyond the narrow interpretation in favor of one that is more practical and useful for market participants. As a result, although our views on likelihood of default would remain a focus of our ratings, it would not be our only consideration.

We are proposing to incorporate credit stability in our ratings because of the high degree of credit volatility recently displayed by certain derivative securities. By explicitly recognizing stability as a factor in our ratings, we intend to align their meanings more closely with our perception of investors' desires and expectations.

We previously announced that we would seek market comments on ways to highlight nondefault risk factors, such as volatility, and we have informally discussed a potential volatility indicator with some investors and other market participants. We are still exploring development of a separate volatility indicator that would complement our traditional credit ratings. However, under the current proposal, a volatility indicator would not be a substitute for explicitly incorporating the stability considerations outlined above into our ratings.

On May 29, we published "Request For Comment: Should An Identifier Be Added To Standard & Poor’s Structured Finance Ratings?" on RatingsDirect, the real-time, Web-based source for Standard & Poor's credit ratings, research, and risk analysis. The response deadline is July 31. We proposed adding an "s" identifier to ratings on securities issued from securitization transactions. The purpose of the identifier would be to provide greater transparency and insight to market participants by distinguishing ratings on structured finance instruments from ratings on corporate and government entities and obligations. The incorporation of credit stability in our ratings would not supplant an "s" identifier. We might implement one, both, or neither.

Responses should be submitted on or before Aug. 6, 2008. Written responses should be sent to the following address: criteriacomments@standardandpoors.com.

Do you support the proposal to explicitly recognize credit stability as an important factor in our ratings? Why or why not?

• "Standard & Poor's Reaffirms Its Commitment To The Goal Of Comparable Ratings Across Sectors And Outlines Related Actions," published on May 6, 2008.
• "Detailed Descriptions Of S&P's New Actions Aimed At Strengthening The Ratings Process," published on Feb. 7, 2008.

All related articles are available on RatingsDirect, the real-time Web-based source for our credit ratings, research, and risk analysis, at www.ratingsdirect.com. They can also be found on our Web site at www.standardandpoors.com.