It was more of a relief than a surprise last week when Moody's Investors Service confirmed that the ratings of structured finance deals displayed a higher degree of stability than corporate ratings from 1998 to 2001. The rating agency added that it expects the stability of the European structured finance markets to continue.
According to the agency's first report on the European structured finance markets, no European ABS rated by Moody's has defaulted. In fact, European ABS ratings have been marginally more stable than ABS ratings in the U.S. The 10 investment-grade European ABS transactions rated by Moody's remained stable 89.9% of the time from 1998 to 2001, with five of those showing a stability of over 95%. The U.S. ABS and corporate investment-grade figures show stability greater than 73% for nine issues rated by the agency over the same period, but none of those retained a ratings stability of 90%.
Ninety-seven percent of European ABS downgrades involve CDOs, while upgrades were dominated by RMBS, accounting for 47% of those totals. Going forward, Moody's expects these trends to continue. The report also noted that A3 tranches demonstrated the greatest volatility, with 5.9% upgrades and 4.2% downgrades.
While the European market appears more stable within the 1998-to-2001 time period, analysts point out that these deals might show more signs of stress over time, as European ABS transactions are typically less seasoned than their U.S. counterparts. In addition, the European figures are based on a sample size that is 10% of that of the U.S., warned an analyst at Morgan Stanley.
"Given the fact that the European market is younger, it could perhaps be argued that the agencies are exercising more caution when sizing credit enhancement," the source continued.
However, the results come as no surprise to market sources, and echo similar conclusions made earlier this year in a study published in February by Standard & Poor's. "We believe that the Moody's study is positive for the market," commented analysts at Morgan Stanley. "Not only did it reach the same positive conclusions as those published by S&P, it significantly increased the proportion of the market included in the report."
But market analysts said that while the reports arrived at similar conclusions, it was important to note that the S&P study included transactions dated from 1987 to 2001. Sources at Moody's said they opted to exclude the earlier information from their report because the number of rated tranches prior to 1998 was minimal. The agency felt that it would be statistically "far too dangerous" to include them as part of the study.