The European Central Bank (ECB) has relaxed its collateral requirements for repo eligibility in a move that encourages new ABS activity.
The ABS rating requirements will be relaxed on undetermined date, although "only where new non-ratings-based criteria in addition to the already existing criteria are satisfied," Barclays Capital analysts said in a report. "No change is made to the minimum ratings requirements that must be satisfied for the life of an eligible ABS security."
This is why, analysts said, the ECB’s measure effectively removes the distinction between initial and current rating, which was introduced only a few quarters ago introducing confusion for some ABS bonds.
As part of its initiative, the ECB reduced the minimum threshold for some ABS to a single-A credit rating from triple-A.
Since March 2011, following the expiration of all applicable grandfathering clauses, only ABS bonds with at least two initial triple-A ratings, or lower ratings for older transactions, and at least two single-A minus, or better ratings, over the life of the security have been eligible as ECB repo collateral.
According to Barclays analysts, the ECB initiative will largely target yet-to-be issued ABS bonds, as opposed to bonds already outstanding.
"Achieving an 'AAA' rating at Standard & Poor's has become ever more difficult even for senior ABS notes due to the rating agency’s new counterparty credit criteria," analysts said. "The situation is similar, although not as stark, at Moody’s [Investors Service] due to that agency’s operational risk criteria. In addition, weaker sovereign and transaction counterparty ratings have contributed to the difficulty of achieving triple-A ratings even for senior ABS tranches."
Barclays said that by waiving the triple-A rating criterion in exchange for other criteria, the ECB is effectively encouraging originators to create new securitization deals and deliver the newly issued and retained notes into its repo facility. Analysts said that this effectively unclogs "the pipeline of retained ABS deals and allowing it to provide liquidity to the Eurozone banking system using this avenue once more, while at the same time reducing the risk of such a clog-up to become more severe should further sovereign and (consequent) counterparty downgrades be in the offing for next year."
The bank will also allow central banks at the national level within the euro-zone to take bank loans and ABS as collateral. The ECB has also reduced the reserve requirements for its repo operation.