The U.S. non-mortgage term ABS market saw more downgrades than upgrades last year, but analysts from Fitch Ratings expect the picture to even out in 2005, amid a stable ABS market. Fitch issued 183 upgrades, versus 221 downgrades in 2004, but considering that Fitch issued 66 upgrades and more than 1,000 downgrades in 2003, it looks as if an even brighter ratings picture is on the way. Kevin D'Albert, a director at Fitch, said stable collateral performance and improving credit enhancement have helped to keep the pace of upgrades strong and that the trend should continue into 2005.
The leading sectors, autos and tobacco, saw 63 and 52 upgrades respectively, with all the positive ratings activity in the tobacco sector due to counter party related factors. All of the tobacco upgrades were in Golden State Tobacco's bonds, as the state of California had its debt rating upgraded. Golden State's bonds were issued through the state, so the upgrade affected their bonds as well. The equipment sector saw 32 upgrades, credit cards had 15 - nine of which were counter party related - and there were 15 upgrades in the student loan sector and also the time-share sector had eight upgrades.
Equipment lease ABS had the roughest year in terms of downgrades with 103, while aircraft lease ABS and tobacco each saw 41 downgrades. The franchise loan sector had 25 downgrades, student loans had five and auto loans had six. The tobacco and student loan downgrades were the result of counter party related factors. The tobacco downgrades were the result of a downgrade of the state of California's debt in January, the precursor to the above-mentioned upgrades. The student loan downgrades came as two issuers in Texas switched liquidity providers from Sallie Mae, to the lower-rated State Street.
Downgrades within the investment-grade spectrum accounted for approximately 51.1% of total negative rating activity in 2004, while downgrades from investment grade to speculative grade represented approximately 19.5% of total downgrades. The remaining 29.5% of downgrades were from junk-rated bonds. In 2004, only one bond defaulted, compared with a total of 10 defaults in 2003.
Notable ratings activity in December included three downgrades for Falcon Auto Dealership Loan Trust 2003-1, due to the corporate restructuring of one loan currently representing 6.8% of the pool. In autos, Fitch upgraded the outstanding B, C and D notes of WFS Financial Owner Trust 2003-1 and 2003-2 due to increased available credit enhancement.
Also last month, in the equipment lease sector, Fitch upgraded the class B notes of Caterpillar Financial Asset Trust 2002-A, due to increasing levels of credit enhancement. In student loans, Fitch upgraded eight class B notes from various SLM Student Loan Trust transactions. These positive rating actions were the result of increased credit enhancement relative to expected remaining losses and better than expected performance on Federal Family Education Loan Program student loan collateral.
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