The 2006 upgrade to downgrade ratio has been the most favorable in years, Barclays Capital analysts said. However, they caution that investors should pay heed to the overall credit picture and be ready for the potential credit-related issues that might creep up in 2007.
"Despite the benign fundamentals outlook, we expect performance for European ABS in 2007 to be a bit worse than in 2006," said Hans Vrensen, head of the Barclays European securitization research team. "However, we expect it still to be good relative to historical averages. This follows on from moderate increases in delinquencies and losses for select sectors (U.K. RMBS and credit cards) in 2006. As a consequence, we expect credit ratings to remain stable overall as usual, but less frequent upgrades during 2007 than in the recent past."
Barclays put out a relative value framework last year that looks across analyses by the three major rating agencies - Moody's Investors Service, Standard & Poor's and Fitch Ratings. Vrensen emphasized that now would be a good time to employ such transparent tools that allow investors to be more selective when picking out deals. "Our analysis allows for comparisons between the agencies as well as different ABS asset types," he said.
Traditionally, each of the three major rating agencies reports annually on rating transitions in European structured finance. One drawback, however, is that the respective agencies analyze only their own ratings. According to Barclays, none of the agencies covers 100% of the European ABS universe, since no agency rates all bonds.
The Barclays comparison attempts to simplify the rating transition analysis by consolidating the historical ratings of the main agencies for all securities tracked in the Barclays securitization research database, which facilitates direct comparison of each agency's ratings as well as their overall position on different ABS asset types.
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