Adding to the investor concern over a bearish ABS CDO market, Derivative Fitch recently announced that it may cut the ratings on classes from three 2003 diversified structured finance CDOs and one high-grade CDO issued last year that have exposure to the infamous 2006 vintage subprime closed-end second liens.
With the 2006 vintage subprime closed-end second lien RMBS having unprecedented default and loss performance, as evidenced by the negative ratings actions by Fitch, Standard & Poor's and Moody's Investors Service, there continues to be an enormous amount of uncertainty with respect to the future performance of those bonds, said Kevin Kendra, managing director at Derivative Fitch.
One of the big uncertainty items on a month-to-month basis is when the servicer is going to write off the affected items, he said, which is why there may be large swings in the performance. "The reason why you are seeing these surges in ratings actions is because of the timing and scope of servicer activity - when and how many loans they charge off result in realized losses in the RMBS structure."
Indeed, Fitch placed two classes of notes issued by Trainer Wortham First Republic CBO III on rating watch negative, including $13.7 million of class D notes rated BBB' and $6.2 million in preference shares rated BB'. The rating agency also placed $17.99 million class D notes - which were rated BBB', issued by ACA ABS 2003-1 and managed by ACA Management - on rating watch negative as well as three classes of notes issued by ACA ABS 2003-2, including $7 million of class B to F notes rated BBB', $14.9 million class B to V notes rated BBB', and $2.98 million in class C notes rated BB'. MFS Investment Management also took a hit when Fitch placed two classes of notes issued by its investment vehicle Ipswich Street CDO, including $9.94 million class D notes rated BBB' and $7.9 million class E notes rated BB+'.
Ipswich Street CDO had downgrades on three subprime closed-end second-lien (CES) RMBS bonds that constitute 1.04% of the underlying portfolio, with an additional 2.18% of the portfolio placed on rating watch negative, Fitch said. Two of the three downgraded assets were lowered below investment grade to B-' and BB' from A' and remain on rating watch negative. All of the assets affected by both rating actions consist of 2006 vintage closed-end second liens.
ACA's ABS 2003-1 and 2003-2 CDOs were also at risk of a further downgrade. The 2003-1 vehicle has seen approximately 7.9% of the portfolio downgraded since February 2007, and another 5.9% of the portfolio is currently on rating watch negative. The portfolio contains six 2006 vintage subprime closed-end second-lien RMBS bonds making up approximately 5% of the portfolio. Of these six bonds, three have been downgraded by at least a full rating category and are still on rating watch negative.
In the 2003-2 vehicle, approximately 9.2% of the portfolio has been downgraded so far this year, and another 7.9% of the portfolio is currently on Fitch's rating watch negative. The ACA ABS 2003-2 contains 15 closed-end second-lien RMBS bonds of 2006 vintage that make up approximately 8.7% of the portfolio. Of these 15 bonds, four have been downgraded by at least a full rating category.
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