25 February 2012

IFR: Moody's move threatens Triple A ABS

Moody's downgrade of Italy and Spain two weeks ago, combined with its decision to cap ratings for structured finance bonds from those countries to four notches above sovereign ratings, has stripped a series of originators of the ability to achieve Triple A ratings.

The inability of structured finance issuers from the five peripheral countries to achieve the highest rating is of little immediate consequence as none could sell a public deal in the current market.

It is also true that recent regulatory initiatives mean they do not have to worry too much about getting bonds to Triple A. The ECB, for example, relaxed its repo rules to permit Single A rated bonds. Greece is the only outlier in not being able to get to Single A (capped at B1) under Moody’s’ current ratings, but it was granted special dispensation at the ECB anyway.

That means issuers from the five countries can still structure and retain deals for repo without obsessing about Triple A status, while the LTRO has also come to the rescue of liquidity-starved banks. Therefore, Triple A is now irrelevant for a large sector of the market.

Even in core countries where the top rating is achievable, bank and counterparty criteria changes remain a huge threat to the top rating. Moody’s has 17 global and 114 European-focused institutions on review for downgrade, which could have big implications on ABS for those banks pushed below A2/P-1 that act as counterparties.

It might even be helpful for the market if issuers give up the belief that achieving Triple A status is vital. For example, S&P said recently that “wider acceptance of lower-rated securities and greater acknowledgement of different rating methodologies could be positive for the structured finance market”.

And RBS analysts Chimdi Momah and Krishna Prasad argue that Triple A bonds “may gradually lose their appeal due to the cost of structuring these notes given the fewer number of eligible counterparties. The only remaining raison d’être for Triple A ABS bonds as far as we can see is that regulators believe it is worth something, manifest in risk weightings used in solvency regimes for banks [standardised Basel rules] and likely also insurers under Solvency II. Otherwise, we can see no reason why a market for senior-most ABS ratings in the Double A or even Single A categories will not be viable going forward as a contemporary alternative to Triple A ratings of old.”

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