Downgrades in Q303 were down sharply from Q103, with the exception of CDOs and equipment leases, according to Moody's Investors Service, which is expected to release these findings in its report detailing upgrade/downgrade activity for the third quarter. The report is due out in the coming days.
Decreased downgrade activity of asset-backed securities was reflected via 212 downgrades in all, compared with 792 and 709 downgrades in the first and second quarters of 2003, respectively. The $9.5 billion represented by the 212 downgrades contrasted sharply with the 36 upgrades for the quarter, which represented $700 million. However, Moody's analysts noted the rash of downgrade activity in Q103 was derived mostly from rating actions taken against tobacco settlement-related securitizations. Taking that into account, analysts found that by excluding tobacco-related transactions, the number of downgrades in Q303 still declined compared with the levels seen in the first half of the year.
Of the 36 asset-backed upgrades, 81% were related to home equity transactions from Saxon Asset Securities Trust. The remaining 19% occurred in the CDO sector and were derived from de-levering of notes. Upgrades in Q303 have actually doubled since Q2v, when Moody's found 15 upgrades. Prior to July 2003, the majority of upgrades typically occurred in the manufactured housing, credit card and student loan sectors due, largely, to the buildup of credit enhancements or strong asset performance, according to the rating agency.
CDOs led downgrades in the third quarter, Moody's found, accounting for 43% of all asset-backed downgrades. Yet the 92 downgrades in Q303 were a 50% decrease from the 178 in the CDO sector in Q203. Furthermore, the last time CDOs saw downgrades that numbered fewer than 100 was in Q4 2001. The majority of downgrades in Q3v were due to deterioration in the credit quality of underlying portfolios.
Other sectors had an interesting dichotomy of activity in the third quarter.
Equipment leases claimed the second-largest share of downgrades for the third quarter 28%. According to Moody's, there were 59 downgrades, 51 of which were related to DVI Financial Services Inc. equipment lease securitizations. Prior to July, there were 189 downgrades of securities in this sector.
Aircraft lease and franchise loan sector saw a decreased pace of downgrade activity for the quarter. In all, nine downgrades occurred in the aircraft sector, compared with 39 in Q203. Franchise loans recorded seven downgrades, compared with 33 in the second quarter.
Approximately 13% of all downgrades seen in the third quarter were in the manufactured housing sector, with 27 classes from seven United Companies Financial Corp.'s deals nicked in August, Moody's reported.
In all, Moody's found 48.7% of downgrade activity was concentrated in CDOs, 19.5% in manufactured housing and 7.6% in the franchise loan sector. The majority of asset-backed downgrades in Q3 were caused by weak performance of underlying collateral, a close reflection of historical norms, according to the agency. Additional factors included uncertainty with respect to the quality of the servicing, which was found in 51 classes of notes issued in nine medical equipment securitizations from DVI.