Though the sector still faces challenges, Fitch Ratings sees signs of improvement in the market for Asset-Backed Commercial Paper.
In the first quarter, market participants remained saddled with many of the same issues plaguing the ABCP market since last summer, which contributed to a further 11% slide in U.S. ABCP outstandings ($722 billion) from year-end 2007. Outstandings were down 44% from the peak in July 2007, due to the termination and unwinding of Special Investment Vehicles and other complex program types.
From a credit perspective, however, several positive trends are emerging in the ABCP market, according to Managing Director and group head Michael Dean.
Over the past several months, many of the surviving ABCP conduit administrators have taken proactive measures to both improve the credit quality of their portfolios and to enhance the structural protections afforded investors.
Despite continued troubles such as an uncertain U.S. economy and heightened concerns surrounding recessionary fears, Fitch does not anticipate that these macro issues will directly affect the ratings of traditional multiseller ABCP conduits. However, ‘global bank rating pressures could translate into ABCP sponsor, liquidity provider, and counterparty rating action that could affect ABCP ratings,’ Dean said.
Fitch’s latest ABCP Paper Trail notes the following positive actions by ABCP sponsors:
- Cleansing portfolios of troubled exposures and eliminating certain asset classes altogether.
- Tightening covenants and triggers with sellers.
- Eliminating funding outs under liquidity agreements, including downgrade provisions for transactions insured by financial guarantors.
- Increasing credit enhancement levels on a transaction-specific basis, often to the sponsors highest internal standard.
- Adding programwide credit enhancement (PWCE) or increasing existing PWCE levels.
- Fully supporting certain transactions through liquidity.
- Fully supporting the entire conduit portfolio.
- Increasing disclosure.
- Relaunching programs with additional ratings to increase visibility and information available.
Technorati Tags: asset-backed-securities, SIV, structured-finance
In another sign of the demise of special investment vehicles, Moody’s today placed the ratings of six European SIV capital note programs on review for downgrade, affecting $3 billion of debt securities.
Moody’s said SIV capital notes have been the most negatively impacted by the funding and pricing difficulties that have caused the sector to all but disappear in the wake of the ongoing liquidity crisis.
Today’s rating actions reflect further deterioration in the market values of SIV portfolios, and the limited benefits to capital notes of the various restructuring proposals implemented by bank sponsors.
Moody’s said its review will focus on the decline in capital net asset value, which incorporates both crystallised losses following asset sales and unrealised losses. Moody’s will also review the actual or potential impact on capital notes of any restructuring plans implemented by a vehicle’s sponsor.
The affected vehicles are Asscher Finance, Harrier Finance, Kestrel Funding, Links Finance, Nightingale Finance and Premier Asset Collateralized Entity. Full details of the programs are available here.
Technorati Tags: SIV, structured-finance
Fitch Ratings has decided to continue to use its existing ratings scale to rate Market Value Structures such as Special Investment Vehicles, as there was limited market appetite for a proposed separate ratings scale for these instruments. Based on the feedback to its request for comment, Fitch said it has revised its criteria as follows:
- Traditional MVS may be rated as high as ‘AAA’, subject to additional stresses. Traditional MVS are those structures with deleveraging/protection based triggers that are set “outside of the tranche,” such that the transaction may be able to undertake an orderly deleveraging/unwind without loss to the rated notes.
- MVS backed by less liquid asset types will not be eligible, in most cases, to receive ratings above ‘A’. MVS with illiquid assets will not be eligible, in most cases, for investment-grade (IG) ratings and may, in fact, not be eligible to be rated.
- Ratings for “Knock-out” MVS, in most cases, will be capped at ‘BBB’. Knock-out MVS are those structures with high loss triggers set “inside of the tranche,” such that the transaction may unwind with a significant/total loss to the rated notes.
- Limited weight, if any, will be given to partial liquidity mechanisms unless such a mechanism provides clear structural benefits.
Given the concern of market participants regarding transparency of MVS, Fitch is re-emphasizing the importance of transparency from managers in their ongoing reporting.
- Fitch will apply both quantitative and qualitative considerations when analyzing MVS. Quantitative factors will include new and updated advance rates (AR)/overcollateralization (O/C) ranges for various asset types based on data that include the recent stress that has occurred beginning in latter half of 2007. Qualitative factors will include structural market changes that may render past performance data less relevant, manager skill set, pricing procedures, and any data limitations.
- Ranges of ARs at each ratings level will be established by classifying asset types into a limited number of categories. Assets will be assigned to these categories based on their expected liquidity and volatility, particularly with respect to their performance throughout this current market crisis and other stressed market conditions, as well as their structural complexity and transparency. Assignment to categories will be fluid, and assets may move from one category to another based on Fitch’s developing views.
- Fitch will use the new criteria to surveill and re-evaluate its ratings on all existing MVS transactions.Within this framework, Fitch will evaluate MVS transactions on a case-by-case basis taking into account the nature of the assets and any unique structural features. All proposed transactions will be presented to a standing MVS committee, which will apply the framework set out in this report to analyze each transaction’s risks and merits.
MVS can be either cash or synthetic structures. In either case, as with other asset-backed securities (ABS), the issuer of debt is typically a bankruptcy-remote special purpose vehicle. A security interest in the assets purchased with the proceeds of the debt is created for the benefit of the noteholders, and the assets are held by a trustee. In cash structures, debt proceeds are used to purchase a portfolio of securities that is managed by an investment manager. In synthetic transactions, debt proceeds are used to purchase a portfolio of short-term highly rated securities, and market risk is introduced primarily via a credit default swap or a total return swap between the issuer and a third party.
Details are available in Rating Market Value Structures.
Technorati Tags: SIV, structured-finance
The continuing fallout of the subprime-induced credit crunch dominated the most-read posts at Research Recap in the first quarter. Indeed, all ten were related in some way to the financial turbulence.
When Research Recap first began posting on hitherto obscure topics such as subprime-backed debt instruments last summer, few outside the financial markets had heard of CDO, SIV and CDS. Now they are featured, if not fully understood, in the general media.
With subprime becoming prime time, our visitors are looking for the next shoe to drop. Judging by the hugely popular chart-topping post Warning Signs Seen in Rising Credit Card Delinquencies, there’s plenty of concern to go around. This post from CreditSights jumped right to the top of the rankings, despite being posted in the last week of the quarter.
It is gratifying to see people turning to Research Recap in increasing numbers in search of education on esoteric topics. The silver and bronze medals go to Research Primers on Credit Default Swaps, from Fitch, and on Structured Investment Vehicles, from Moody’s, both posted in January.
“Monolines” also become front page news and made the #4 spot, thanks to Standard & Poor’s February post, Bond Insurer Downgrades Could Lead to Bank Downgrades.
In fifth place, with a steady level of interest over several weeks, was the December analysis, Role of Hedge Funds in Subprime Crisis Examined, from the International Monetary Fund.
But the “Dark Side of the Moon” award for longest time in the charts goes to the very first Research Primer we posted in June, on Subprime Mortgage Lending from NERA Economic Consulting.
Oxford Analytica weighed in at #7 with its early January contribution Market-led Measures Not Enough to Solve Subprime Fallout. CreditSights featured again at #8 with its March post Write-down Spotlight Shifts to European Banks.
An early-March post from multiple sources, Alternative Proposals to Stem Subprime Foreclosures, took the ninth spot and the mid-March contribution Audit Integrity Questions Citigroup’s Risk Assessment rounded out the top ten.
Technorati Tags: asset-backed-securities, banking-system, bond-insurers, corporate-governance, credit-cards, credit-default-swaps, Hedge-Funds, SIV, structured-finance, subprime-mortgage, Zeitgeist
There is little doubt that one of the consequences of the subprime mess will be an increase in lawsuits. So it comes as no surprise that the topic of shareholder lawsuits was one of the most widely read on Research Recap this week. What is perhaps surprising is that financial firms are not (yet) high on the list of those most likely to be sued by shareholders. According to Audit Integrity, technology and healthcare firms are most likely to be sued.
Still, the financial sector made a (dis)respectable fourth place showing. As legal action is typically a lagging indicator, it will be interesting to see how this list looks a year from now.
Visitors also demonstrated continuing interest in the broader real estate market, as evidenced by the popularity of Ernst & Young’s Global Real Estate Trends for 2008. Primers on Credit Default Swaps and Structured Investment Vehicles again drew strong interest as did Securitization Prime Suspect in Subprime Meltdown.
And while the fate of the monoline bond insurers hangs in the balance, the main issue is not whether, but how, the industry will be “restructured.” FT Alphaville has a handy summary of latest developments, including the FT’s interview with recently returned chief executive Jay Brown of MBIA, who has been involved with the company since its inception.
The Economist opines that the fears over the municipal-bond market in America look overdone. “For the moment, the government should resist the urge to intervene.”
Technorati Tags: bond-insurers, credit-default-swaps, monoline-insurers, Real-Estate, securitization, shareholder-class-action, SIV, subprime-mortgage, Zeitgeist
With news about once obscure monoline bond insurers hitting the front pages of even general interest newsapers, it’s hardly suprising that people continue to turn to Research Recap for a better understanding of the complex debt instruments that got them into trouble.
Fitch Ratings’ Primer on Credit Default Swaps was the most-read post of the week, and Primers on Structured Investment Vehicles and Subprime mortgages also were widely read.
Standard & Poor’s warning that Bond Insurer Downgrades Could Lead to Bank Downgrades and the CreditSights analysis of S&P’s gloomy outlook for monoline and bank credit ratings made the top six.
The fate of the monolines remains a hot topic, and a rapidly moving target: The Big Picture offers a useful (and blunt) analysis of the most recent developments. Meanwhile, the FT’s Alphaville details the latest rescue plans and offers a new take on long-time monoline critic Bill Ackman.
Also popular during the latest week were a pair of academic analyses featured by The Economist pointing to securitization as the prime suspect in the subprime meltdown.
Technorati Tags: bond-insurers, credit-default-swaps, monoline-insurers, securitization, SIV, subprime-mortgage, Zeitgeist
In the wake of claims that standard rating criteria do not adequately reflect the risks of complex structured finance instruments, Moody’s is taking the unusual step of seeking comments on its ratings methodology and whether and how it might be changed or improved.
In a Request for Comment, Moody’s “discusses possible alternatives for differentiating structured finance ratings from non-structured finance ratings, highlights potential features and limitations of these options, and seeks market
opinion on the next step – or combination of steps – that may be appropriate for us to take.”
To facilitate the collection and assessment of market feedback on the proposal, Moody’s is asking interested parties to complete a survey by the end of this month.
Some market participants have asserted that structured and non-structured securities possess inherently different risk characteristics, such that, for example, Aaa-rated structured securities may not have the same risk characteristics as Aaa-rated corporate securities, Moody’s says.
Distinguishing the ratings of structured securities from non-structured securities could help raise investor awareness of potential differences in meaning and behavioral attributes between the two categories of securities, providing further information to investors in their investment decision-making processes.
Options for consideration are to:
- Move to a completely new rating scale for structured securities, for example, numerical rankings of 1-21. These would continue to contain ordinal rankings of expected credit risk and would probably map to corporate ratings.
- Add a modifier to all structured ratings utilizing the existing rating scale, e.g., Aaa.sf. This would designate the issue as structured, but add no other additional information.
- Add a suffix to the existing rating scale for structured ratings that contains additional information – for example, estimates of multi-notch rating transition risk. This could be Aaa.v1, Aaa.v2, etc. We would derive these gradations through an analytical process that would be disclosed to the market.
- Use the existing rating scale for structured securities, and put additional analytical information in a separate scale that would exist in a separate data field. For example, an issue could have a “Aaa rating, with a ratings change risk indicator of v1”. The added field would be analogous to our existing ratings outlooks and watchlists.
- Make no changes to the rating scale, but provide additional information and commentary through written research.
The survey is accessible at www.moodys.com/ratingsurvey. Moodys says responses can be provided on an anonymous basis and can also be submitted via e-mail to Moody’s Credit Policy inbox at CPC@moodys.com. Moody’s hopes to provide the market with an analysis of the responses received within the following two to three months.
Technorati Tags: credit-ratings, credit-risk, Moodys, SIV, structured-finance
Moody’s has issued a pair of reports on Structured Investment Vehicles (SIVs) that serve as a useful primer on these complex “special-purpose structured finance operating companies.” In A Short Guide to SIVs, Moody’s provides a helpful definition of these entities:
Put simply, SIVs issue short-term debt – mainly asset-backed commercial paper (ABCP) and medium-term notes (MTN) – to fund the purchase of a diversified portfolio of higher-yielding long-term credit assets.
They could be said to operate as virtual banks, taking “deposits” from ABCP and MTN investors and “lending” the proceeds out to purchase bonds.
The aim is to generate a spread between the cost of funding and the yield on the portfolio by managing credit and liquidity risks.
The current tightening in the credit markets, largely brought about by market deterioration of US subprime mortgage-backed securities, has made managing such risks a much more complicated proposition, Moody’s says.
The concise report report addresses the problems of falling net asset values and frozen commercial paper markets that have plagued SIVs and those who invested in them. It also includes suggestions for helping restore SIV liquidity.
A related Special Report, Moody’s Update on Structured Investment Vehicles, provides extensive details on SIV holdings.
The overview highlights several factors Moody’s considers in its monitoring of SIV ratings. The report covers various restructuring and other alternative funding initiatives that have been, or are currently being, implemented by SIVs.
Indeed, the entire SIV business model is now widely acknowledged as unsustainable without restructuring
Moody’s presents statistics on SIV net asset values, the maturity profile of senior liabilities, and portfolio sector, rating and country compositions. Also included are statistics on available backstop liquidity and cash deposits, the average life of asset portfolios, aggregate mark-to- market prices and realized values, and the amount of leverage applied by vehicles in the sector.
Moody’s notes that as the Weighted Average Life of liabilities indicates the extent of near-term funding pressures a vehicle may face, “those vehicles with the shortest WALs may be required to take urgent action (such as asset sales at potentially “fire sale” prices) to ensure repayment of senior debt as it falls due.”
The chart below illustrates aggregate SIV refinancing needs up to November 2008. This is computed by netting daily asset inflows with liability outflows. The result of this computation represents amounts that the sector would need to refinance through alternative funding arrangements or asset liquidations. Thus, $15 billion matured in December 2007, $32 billion matures in January 2008, and $ 89 billion will mature from February to June 2008.
A handy reference tool is Common Terms in Structured Finance, a glossary available free of charge from attorneys Thatcher Proffitt.
Technorati Tags: SIV, structured-finance, subprime
It comes as no surprise that the subprime-induced credit crunch dominated the list of most popular posts on Research Recap in 2007. All but two of the Top Ten posts of the year were related to the topic.
In a photo finish the Number One post of the year was a late entry to the chart, US “Housing Bust” Effects To Linger Until 2009, based on Aftershock: Housing in the Wake of the Mortgage Meltdown from Moody’s Economy.com.
Behind by a nose was More Bank, Brokerage Writedowns, Ratings Cuts Inevitable, based on an early November CreditSights report. CreditSights was also featured, along with Fitch Research and Standard & Poors, in the subsequent and related Number Four post BofA Joins the Writedown Party, But is There More to Come?
The ill-fated M-LEC Superfund designed to bail out Structured Investment Vehicles also drew strong interest. October’s Research Roundup: M-LEC Superfund , questioning the Superfund’s viability came in at Number Three and late December’s M-LEC obituary So Long SuperSIV, We Hardly Knew You rounded out the Top Five.
Other popular subprime-related posts were: the International Monetary Fund December analysis Role of Hedge Funds in Subprime Crisis Examined; November’s alliterative Research Roundup: Writedown Wrapup; and Commercial Real Estate Risks Less Severe Than Subprime from October.
The only non-subprime entrants in the Top Ten were two October posts: Top Executives Paid Double or More Than Their Deputies, based on a survey by salary.com for the Financial Times; and Web Recommendation Engines Can Miss The “Long Tail”, from a paper published by the Wharton School of Business.
It’s a sure bet that “subprime fallout” will remain a popular topic in 2008, including the growing role of Sovereign Wealth Funds, but what will the other hot topics be? Energy issues are likely to remain to the fore, along with economic, regulatory and political issues, which will become increasingly important as we approach the US elections in November. Check in with Research Recap to find out.
Technorati Tags: executive-pay, Hedge-Funds, housing, M-LEC, online-shopping, SIV, solar-energy, subprime-mortgage, Zeitgeist
Subprime-mortgage related posts continued to attract strong interest at Research Recap during the Holiday period, nabbing four of the top five spots.
The demise of the the M-LEC Superfund designed to bail out Structured Investment Vehicles, So Long SuperSIV, We Hardly Knew You, topped the chart, followed by The Rise and Fall of A Subprime CDO from the Wall Street Journal.
Renewable energy broke into the top three with Solar Power Could Supply 69% of US Electricity by 2050, summarizing a “grand plan” authored by Scientific American.
Rounding out the top five were two more subprime posts: the International Monetary Fund analysis Role of Hedge Funds in Subprime Crisis Examined and Market-led Measures Not Enough to Solve Subprime Fallout from Oxford Analytica.
Technorati Tags: Hedge-Funds, housing, M-LEC, SIV, solar-energy, subprime-mortgage, Zeitgeist