Structured financial products linked to homebuilding and real estate continued to suffer more downgrades than upgrades in the third quarter and the outlook remains dim, according to a Standard & Poor’s quarterly report on rated global structured securities.
Both areas could experience additional stress if housing demand is further constrained by a deeper, more protracted recession and/or continued turmoil within the home lending industry. We will continue to closely monitor homebuilder cash positions and revolver availability, as liquidity remains critical to surviving this downturn.
Downgrades on residential mortgage-backed securities (RMBS) rose in the quarter ended Sept. 30 as monthly delinquencies and foreclosures on the underlying collateral increased, especially for transactions issued between 2005 and 2007, S & P said.
Commercial mortgage-backed securities (CMBS) also took a turn for the worse in the quarter, with four times as many rated CMBS sinking to speculative-grade status.
Among the other trends for the third quarter:
–Asset-backed securities (ABS) saw fewer downgrades in the third quarter, with S & P lowering its ratings on 119 ABS classes, down from a record-high 555 downgrades in the second quarter of 2008.
–Collateralized debt obligations (CDOs) were most negatively impacted by the September bankruptcy filing of Lehman Bros. Holdings Inc.
–Downgrades outnumbered upgrades by more than 4.7 to 1 in Europe, with CDOs accounting for the majority of the lowered ratings.
For details, see “Ratings Roundup: Third Quarter 2008 Global Structured Finance Trends.”
Technorati Tags: ABS, asset-backed-securities, CDO, CMBS, commercial mortgage-backed securities, commercial-real-estate, home sales, homebuilders, homebuilding, housing crisis, residential mortgage-backed securities, residential real estate, RMBS, structured-finance
Annualized net losses on U.S. prime auto loan asset-backed securities (ABS) reached a record high in August, but negative rating actions in 2008 have been minimal, according to Fitch Ratings.
Even with these elevated levels of losses, structural features and credit enhancement along with transactions deleveraging, have limited negative ratings actions in 2008, Fitch said. Fitch has upgraded 29 prime auto ABS subordinate tranches in 2008, down from 66 in 2007. During August, Fitch upgraded 11 tranches from four prime transactions including upgrades on transactions of U.S. domestic captives.
Additionally, Fitch continues to issue upgrades on subordinate notes, albeit at a slower rate than in 2007.
In the historically weak fall months, Fitch expects losses may approach the 2% level as predicted at the beginning of the year.
U.S. prime auto loan asset-backed securities (ABS) hit a record high of 1.73% in August, just above the previous high set in early 2003. Auto ABS performance in 2008 continues to be impacted by the poor state of the U.S. economy including rising unemployment, deteriorating consumer health, and lower wholesale vehicle values. The 2007 vintage is producing the highest levels of losses when compared to vintages going back to 2000.
In the prime sector, Fitch’s 60+ days delinquency index was unchanged at 0.71% in August over July, 20% above 2007 levels. Losses rose 22% in August over July driving losses 101% higher when compared to August 2007.
The subprime auto ABS 60 days-or-more delinquency index was at 3.85% in August, 6% higher than July. Losses were at 7.45% in August, 14% over July, and on a year-over-year basis 31% higher than in August 2007. The weakest period of performance for subprime losses was in late 2003 when losses were approximately 9.50%-10%, so current levels remain below this range.
Technorati Tags: asset-backed-securities, auto-loans, credit-markets, structured-finance, subprime
In this space last week we wrote that a financial hurricane awaited if Lehman Brothers was not bailed out over the weekend. But we had no idea quite what a momentous and tumultuous week lay ahead.
So there are no prizes for identifying the Zeitgeist this week: the most turbulent financial market action in many, many years that elicited rounds of name-calling, emergency actions and waves of real and rumored deals. It saw a rather generic statement by President George W. Bush that bizarrely coincided with the start of the strongest two-day stock market rally in history. The more the financial crisis unfolds, the less we seem to know what’s really going on. As last week, expectations are very high that some sort of government-backed “bad debt collector” will emerge from the huddle of regulators and congress, so again, the market could be in for a fall if they don’t deliver.
Visitors to Research Recap were interested in the ripples from the latest developments, with S&P’s report Lehman Failure’s Impact on European Banks (S&P) topping the list.
They also seemed to like our new “Ratings Roundup” that compiles recent moves by the ratings agencies, which were coming thick and fast this week. The first of these, Ratings Roundup: AIG, WaMu, BoA/Merrill,
was our second most popular.
Further worrying signs were found in the third most popular post, Moody’s US Credit Card Performance Continues on Downward Trend. And CreditSights’ Analysis of Recent Financial Deals was also well read, as was 24/7Wall Street’s Solar Energy Firms Taking Hit from Lehman Failure.
Research Recap Quote of The Week:
In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. - Bianco Research, as quoted by The Economist.
Technorati Tags: (AIG), (BCS), (BOA), (HBOS), (LEH), (LYG), (MER), (wm), asset-backed-securities, Bank-of-America, banking-system, Barclays, credit card debt, credit-crisis, credit-ratings, european-banks, Lehman-Brothers, Lloyds TSB, merrill-lynch, renewable-energy, solar-energy, structured-finance, subprime-mortgage, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
AIG (NYSE: AIG)
Moody’s maintains present ratings on AIG and subsidiaries (Sep 18)
Lloyds TSB (NYSE: LYG) HBOS (NYSE:HBOS)
S&P: Lloyds TSB Group Ratings Placed On Watch Neg; HBOS On Watch Dev (Sep 18)
Moody’s reviews Lloyds TSB and HBOS for possible downgrade (Sep 18)
Lehman Brothers (NYSE: LEH)
Fitch: Implications of Lehman Bankruptcy on Global Synthetic CDOs (Sep 18)
Washington Mutual (NYSE: WM)
Washington Mutual Inc. Ratings Unaffected By TPG’s Waiver Of Antidilution Rights (Sep 18)
Previous Ratings Roundup.
Technorati Tags: (AIG), (HBOS), (LEH), (LGY), (wm), asset-backed-securities, banking, banking-system, Barclays, CMBS, credit-ratings, credit-risk, Lehman, Lloyds TSB, RMBS, structured-finance, Washington-Mutual
Recent actions by ratings agencies on financial companies in the news:
AIG (NYSE: AIG)
Fitch Discusses AIG Rating Watch Revision in Light of Federal Reserve Actions (Sep 17)
S&P: CreditWatch Status Of Most AIG Ratings Revised To Developing; Short-Term Ratings Raised (Sep 17)
Barclays (NYSE: BCS)
Fitch Revises Barclays’ Outlook to Negative; Affirms IDR at ‘AA’ (Sep 18)
Moody’s reviews Barclays’ ratings for possible downgrade (Sep 17)
Lloyds TSB (NYSE: LYG) HBOS (NYSE:HBOS)
Fitch Places HBOS and Lloyds TSB on Rating Watch Negative (Sep 18)
Fitch Downgrades HBOS to ‘AA’; Outlook remains Negative (Sep 16)
Lehman Brothers (NYSE: LEH)
Fitch Assessing Lehman Counterparty Exposure in U.S. SF Transactions (Sep 18)
Moody’s Places EMEA ABS Transactions with Lehman Exposure on Review For Downgrade (Sep 18)
Moody’s Places Japanese Structured Finance Transactions with Lehman Hedges on Review For Downgrade (Sep 18)
Moody’s Places RMBS and ABS deals with Lehman Hedges on Review For Possible Downgrade (Sep 18)
Moody’s takes action on credit derivative transactions with Lehman exposure (Sep 18)
Previous Ratings Roundup.
Technorati Tags: (AIG), (BCS), (HBOS), (LEH), (LGY), asset-backed-securities, banking, banking-system, Barclays, CMBS, credit-ratings, credit-risk, Lehman, Lloyds TSB, RMBS, structured-finance
Recent actions by ratings agencies on financial companies in the news:
AIG (NYSE: AIG)
Fitch Revises Rating Watch on AIG to Evolving (Sep 17)
S&P: Ratings On 16 AIG Subsidiary Insurance-Supported Bonds Lowered And Placed On Watch Negative (Sep 16)
Fitch Places AIG South Africa and AIG Life South Africa on Watch Negative (Sep 16)
Fitch Downgrades AIG to ‘A’; Remains on Rating Watch Negative (Sep 15)
Lehman Brothers (NYSE: LEH)
S&P: Lehman Brothers Holdings Inc. Downgraded To ‘D’ (Sep 16)
Fitch Assessing Lehman Counterparty Exposure in 9 European CMBS Transactions (Sep 16)
Fitch Assessing Lehman Counterparty Exposure in 2 European ABS transactions (Sep 16)
Fitch Assessing Lehman Counterparty Exposure in 31 European RMBS Transaction (Sep 16)
Fitch Reviewing Ratings on Tender Option Bonds with Lehman Liquidity and Credit Enhancement (Sep 16)
Fitch Monitoring Potential Implications of Lehman Bankruptcy on Global Synthetic CDOs (Sep 16)
Moody’s Places Lehman Brothers 2007-LLF C5 Floating Commercial Mortgage Trust on Review for Downgrade (Sep 16)
Previous Ratings Roundup.
Technorati Tags: (AIG), (LEH), asset-backed-securities, CDO, CMBS, commercial-real-estate, credit-crisis, credit-rating-agencies, credit-ratings, credit-risk, Lehman-Brothers, RMBS, structured-finance
The fallout from the failure of Lehman Brothers is likely to have a significant effect on a number of large banks in Europe, given the sheer size of Lehman’s balance sheet ($600 billion at Aug. 31, 2008) and off balance sheet activities, says Standard & Poor’s.
The independent broker-dealer business model is not common in Europe, and indeed all of the largest European capital markets operations are part of large “universal” banks. These institutions– UBS (NYSE: UBS), Credit Suisse (NYSE: CS) , Deutsche Bank (NYSE: DB), Barclays (NYSE: BCS), Royal Bank of Scotland (NYSE: RBS), BNP Paribas (Euronext Paris: BNP), and Société Générale (Euronext Paris: GLE)–have a broader business profile, greater diversification, and lower reliance on wholesale funding, when compared with U.S. broker-dealers. “We therefore see them as less vulnerable from the point of view of a potential crisis of confidence and resultant liquidity problem.”
In a new report S&P assesses the financial impact according to three main factors:
1. Debt holdings. Lehman had outstanding long-term debt of approximately $110 billion at Aug. 31 Short-term commercial paper outstanding was around $8 billion at end-May, but has likely reduced significantly since this time. We believe that a broad range of financial institutions, not just banks, are likely to hold some of this paper. So far, we have not yet identified particular concentration that would threaten a rating, but some exposures are material.
2. Counterparty exposure. A more significant exposure is likely to be counterparty risk to Lehman affiliates. These exposures should mostly be confined to the largest banks and broker-dealers, but smaller institutions are also likely to have some exposure. Again, so far we believe that such exposures are moderate and manageable for large institutions.
3. Market price impact. In our view, even those capital market players with negligible direct exposure to Lehman will likely suffer, and to a potentially greater extent. This is because the unwinding of Lehman’s balance sheet is likely to result in further downward pressure on the valuations of a range of assets, most notably residential and commercial mortgage-backed securities (both U.S. and European), as collateral is sold into the market. However, it is also possible that a large unwind of trades will also place pressure on higher quality assets, leading to pricing pressure across a broader range of securities.
In general, we consider that the market price impact described above is likely to be the most significant risk factor for the larger, complex European institutions, even if it is possible that the unwinding of large positions will lead to renewed calls for the link between “market value” and fair value to be broken.
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Technorati Tags: (BCS), (BNP), (CS), (DB), (GLE), (LEH), (rbs), asset-backed-securities, banking, Barclays, BNP Paribas, Commercial-paper, Credit-Suisse, Deutsche Bank, investment-banking, Lehman-Brothers, mortgage-backed-securities, royal-bank-of-scotland, Societe Generale, structured-finance, UBS
Fitch Ratings is introducing Rating Outlooks for U.S. structured finance transactions to provide more forward-looking information to the market.
Fitch’s Rating Outlook indicates the likely direction of any rating change over a one- to two-year period and may be Positive, Negative, Stable or, occasionally, Evolving. Fitch will review Rating Outlooks concurrently with its review on a structured finance transaction.
Fitch will assign Rating Outlooks to each rated tranche to offer investors a forward-looking opinion about the medium-term prospects of a tranche’s performance.
In assigning or reviewing Rating Outlooks Fitch takes into account:
• The latest collateral performance indicators and trends in performance.
• Trends in delinquencies and losses as compared to Fitch’s original expectations.
• Amount of credit support available to each tranche as a result of the performance
and, where relevant, amortization of the transaction collateral.
• Prospective developments in national or regional economic and/or sector outlooks
that could affect collateral performance.
• Rating Outlook on any supporting corporate, financial institutions, or sovereign
rating.
• Degree of historical information factored into initial assumptions and the extent of
historical information that has become available since.
Newly rated tranches are expected to be assigned a Stable Rating Outlook unless special circumstances exist. For example, when ratings are dependent on another rating, which itself has a Positive or Negative Rating Outlook, the newly issued rating might justify the same Rating Outlook as the dependent rating.
Fitch will also supplement its Rating Outlooks with comments giving reasons for the assigned or revised Outlooks similar in tone to its rationale long-term rating changes so the market will have a better understanding of the potential future performance of the tranches’ ratings.
Introducing Rating Outlooks for U.S. Structured Finance Bonds is available for purchase.
Technorati Tags: asset-backed-securities, credit-rating-agencies, credit-risk, structured-finance
Issuance of asset-backed securities (ABS) in the U.S. was hit hard by the crisis in housing and credit in the first half of 2008, totaling just $104 billion, compared with $318 billion in the first half of 2007, according to Moody’s.
The 67-percent drop in ABS issuance was paced by home equity issuance, which ground nearly to a standstill. Home equity ABS totaled just $1.8 billion in the 2008 first half, less than 1 percent of the $182 billion issued in the first half of 2007.
Home equity ABS tracked by Moody’s include traditional second mortgages, subprime loans, home improvement loans, high loan-to-value (LTV) mortgages and home equity lines of credit (HELOC).
Moody’s said stress in the mortgage market continues to hurt the performance of previously issued mortgage-related ABS, and the firm expects foreclosure and default rates on 2006-2007 issuances to continue to rise, as well as re-default rates on previously modified loans.
Until the housing market stabilizes and more streamlined modification plans kick in, the re-default rates are likely to remain elevated and foreclosures/losses likely to continue to rise.
Moody’s said other major asset classes also saw credit quality decline, but not as dramatically as home equity, and not at a greater magnitude than in previous economic downturns. Among those highlights:
–Credit card issuance rose 1 percent to $47 billion
–Vehicle issuance fell 23 percent to $32 billion
–Student loan issuance fell 35 percent to $21.5 billion
Details are available in ABS 2008 First Half Review: Credit Market Turbulence Leads to Substantial Decline in ABS Issuance.
Technorati Tags: ABS, asset-backed-securities, banking, credit-cards, credit-crisis, credit-markets, economy, financial-markets, HELOC, home-equity-loans, housing, issuance, Moodys, mortgage, subprime-mortgage
The charge-off rate for major US banks is likely to continue to rise for the rest of this year before leveling off and peaking in 2009, according to a new report from financial services consulting firm Aite Group. Charge-offs represent the value of loans removed from the books and charged against loss reserves.
The residential real estate loan charge-off rate is expected to peak at over 2%, while commercial real estate loans should top out at around 1.5%.
Commercial loan charge-offs will most likely see their biggest increases in late 2008 and early 2009, and will continue to rise throughout 2009, Aite says in a report on Managing Delinquencies and Losses in Difficult Times. The forecast is primarily driven by the indirect auto finance industry, which has shown recent struggles with its most recent asset-backed securities (ABS) pools originated in 2006 and 2007.
For auto loans, charge-offs typically peak and flatten out three years after origination. As such, late 2008 and early 2009 will continue to be difficult times for auto finance providers and servicers.
Aite’s report provides a detailed picture of how banks and lenders have arrived at their current predicament, and discusses steps they are taking to manage the current challenges many are facing with rising delinquencies and losses. The report gives insight into expected technology changes and investments, and considers the regulatory implications of the recent housing bill.
Technorati Tags: asset-backed-securities, auto-loans, commercial-real-estate, mortgage, subprime-mortgage