At the ABS East conference, organized by the Information Management Network, the message of ending the market’s over-reliance on ratings rang loud and clear.
However, many participants cautioned against casting aside ratings altogether.
“The investor base incredibly over-relied on credit rating agencies,” said Sean Dobson, chief executive officer at Amherst Holdings, speaking at Monday’s opening panel. “We encourage and help investors to build and rebuild their own level of due diligence.”
PIMCO’s Executive Vice President of Advisory Marketing Kris Kraus said that ratings act as a data point. Also speaking at Monday’s panel, he said that institutional investors have been able to work around some of the issues with credit rating agencies by employing the recently revamped National Association of Insurance Commissioners (NAIC) ratings.
The NAIC modified the methodology for determining its designation for RMBS securities. The nationally recognized statistical rating organization (NRSRO)-based methodology was replaced by one that relies on the results of a financial model that projects expected bond loss, Kraus said.
To determine the expected bond loss, PIMCO Advisory performed a security-level analysis on more than 20,000 RMBS securities held by the U.S. insurance industry by using a proprietary valuation model.
The new methodology, referred to by the NAIC as the RMBS Initiative, utilizes an expected bond loss approach and factors in the statutory carrying value of the bond (relative to remaining par value).
Kraus said that the NAIC ratings have been expanded and mandated to the commercial mortgage space.
Adam Siegel, co-head of ABS/MBS/CMBS trading Americas at Royal Bank of Scotland, said during the panel discussion that ratings in some instances have become more important particularly when it came to determining levels for regulatory capital as outlined under Basel II and Basel III.