Though structurers may deny it, Moody's Investors Service was left off some recent home-equity ABS, as well as home-equity focused CDOs, because of its more conservative ratings methodology on deeply subordinated classes of hyper-tranched transactions, market sources report. The hyper-tranching has led to split ratings on some down-in-credit tranches (see ASR 2/16/04), which Moody's has rated lower than its competitors - and as a result, Moody's has not rated two home equity transactions, or two other recent home equity-focused CDOs.
Moody's, which has a greater than 95% market share in the subprime MBS market and CDO market, may be seeing resistance for some recently implemented practices aimed at taking a more conservative approach than its competitors. In particular, the agency has increased credit enhancement levels for pools with heavy exposure to interest-only loans, as well as its well-documented concerns of basis risk, as interest rates rise.
As a result, Moody's enhancement levels on home equity ABS and subprime mortgage transactions have increased by 15% to 25% in some deals in the second quarter.
"Its definitely a strategy," one CDO banker said. "CDO managers get cheaper collateral without the cost of the enhancement." The banker added that while non-Moody's rated CDOs typically price one to two basis points behind CDOs rated by Moody's, "the [underlying] collateral is also wider."
"But," an investor added, "you can't ignore Moody's rating for a CDO - or you get penalized."
Recent examples of CDOs not rated by Moody's include GMAC-Residential Funding Corp.'s first CDO, which priced June 25. Acacia CDO 5 also priced this week sans a rating from Moody's. In each instance, both Fitch Ratings and Standard & Poor's rated the transaction.
While Moody's-rated CDOs typically price triple-A seniors in the 34 to 36 basis points range over three-month Libor (CoLTs 2004-1 is the tightest print at 34 basis points over), CDOs without Moody's ratings have priced at 37 (Acacia CDO 5) and 38 (RFC CDO 2004-1) basis points over Libor, respectively.
By contrast, the underlying home equity ABS and subprime MBS collateral not rated by Moody's prices up to 125 basis points than the Moody's-rated counterparts.
"The thinking is that if [a CDO asset manager] goes to Moody's, you will get less leverage in your CDO," another source added.
What's more, CDO investors are being shown non-Moody's rated CDOs under the pretense that Moody's did not rate the CDO because it didn't rate the underlying collateral, according to market sources. In some cases, the rating agency had rated senior classes of the referenced deals, but not the subordinates because the ratings would have been below those of both Fitch and S&P, which both rate just to default probability.
"Moody's will do what is right from a credit standpoint," said Moody's RMBS group managing director Pramila Gupta. "We will not alter credit enhancement to capture market share," she added.
Another recent methodology change implemented by Moody's may also be experiencing backlash from CDO collateral managers, added Gus Harris, a managing director in the CDO group. "Moody's policy on haircuts for discounting underlying collateral is feeling a pullback from [collateral] managers. Managers want to be able to buy a RMBS mezzanine bond at 50 cents on the dollar and put a full par value on it," he said.
"Moody's is constantly revisiting its CDO methodology," added Moody's Harris, but in this instance, "we can't change our opinion of the underlying collateral."
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