By Erkan Erturk, Ph.D., director, and Tom Gillis, managing director, Standard & Poor's Ratings Services

Global structured securities experienced relatively significant rating volatility, both upward and downward, during the first three months of this year. A review of the performance suggests a mixed activity for the structured market sectors and asset types. For example, RMBS ratings demonstrated strength in their credit quality, many sub-sectors were just stable, and a limited number of ABS

asset types and CDO segments continued showing weaknesses in their rating performance during the first three months.

The following performance is observed during the first quarter:

* RMBS ratings continued with their historical upgrade pattern and accounted for the majority of upgrades during the quarter.

* A limited number of ABS asset types such as manufactured housing, franchise loan, and aircraft ABS, as well as CDO segments such as synthetic arbitrage corporate, corporate high-yield and structured finance CDO transactions, accounted for the vast majority of downgrades during this quarter.

* Overall, 3.06% of structured securities experienced rating transitions. This compares with a rating transition rate of 3.22% in the last quarter of 2003 and 2.09% in the first quarter of 2003.

* The upgrade ratio during this quarter was 1.79% versus 2.28% in the last quarter of 2003. In other words, 1.79% of outstanding ratings were raised during this period and this upgrade rate was lower than the last quarter's experience.

* The downgrade ratio was 1.27% for the global structured finance. This compares with a rate of 0.94% during the last quarter of 2003.

This rating transition article discusses Standard & Poor's long-term rating performance of global structured securities during the first quarter of 2004. In general, a rating transition is associated with the time period in which a security's rating performance is measured, such as the first three months of this year. A security's beginning and ending ratings during this period and in any quarterly transition period are used to calculate transition rates.

Performance by region

and sector

Relatively significant rating volatility was observed during the first three months of this year, and Table 1 provides insight into how Standard & Poor's structured ratings performed during this period. It shows that 1.79% of outstanding securities rated by Standard & Poor's were upgraded and 1.27% of ratings were lowered during this quarter. Although the upgrade rate of 1.79% was lower than 2.28% experienced during the last quarter of 2003, it was well above the rate of 85 bps observed in the first quarter of 2003. The downgrade rate of 1.27% was relatively higher than the 94 bps experienced in the last quarter and similar to 1.25% experienced in the first quarter of 2003.

U.S. ABS performed relatively worse this quarter than the last quarter of 2003. For instance, 5.91% of U.S. ABS ratings were lowered compared to a downgrade rate of 1.33% during the last quarter of 2003. Euro ABS performed relatively better than last quarter with a downgrade rate of 63 bps compared to 89 bps in the previous quarter. U.S. and European CDOs both performed relatively better this quarter than the previous ones. However, the downgrade rate of 91 bps for U.S. CDO and the downgrade rate of 2.53% for European CDOs were still significant. U.S. and European RMBS continued to experience

significant upgrades during the most recent quarter and their downgrade rates were minimal. Finally, single-issue synthetics experienced lower downgrades during this

past quarter compared to the

previous ones.

Sub-sector performance

Sub-sector performance shows that the vast majority of upgrades and downgrades during the quarter were restricted to a limited number of asset types or segments (see Table 2). On a negative note, about 44% of manufactured housing ABS, 15.63% of franchise loan ABS, 5.77% of aircraft ABS and 5.2% of synthetic arbitrage corporate CDO ratings experienced downgrades during the first three months. On a positive note, future flow ABS transactions as well as RMBS sub-sectors such as high-LTV, Alt-A, home improvements, and prime categories experienced significant upgrades during this quarter.

Other sub-sectors either experienced modest levels of rating transitions and as a result were included in Table 2 or did not experience any rating transition during this period, and thus were not included. For example, auto ABS experienced upgrades of 39 bps and are included in this table, but credit card ABS performance is not included, as it had a stability rate of 100%. Among RMBS ratings, the sub-prime category was the only one with any downgrades (only 13 bps of outstanding securities). Other RMBS sub-sectors continued with their historical upgrade pattern similar to the 2003 experience. Among CDO segments, securities backed by high-yield corporate bonds as well as structured securities turned in relatively significant downgrades.

For further analysis of last quarter's structured finance rating activity, see the recently released article, "Structured Finance Global Ratings Roundup Quarterly: First-Quarter Performance Trends", available on RatingsDirect and at

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