By Erkan Erturk, Phd, director and Tom Gillis managing director in the S&P structured finance group
Standard & Poor's rated global structured securities continued to perform well during the first quarter of 2005. The upgrade rate for structured finance securities was more than three times the downgrade rate in the first quarter. This positive performance was pronounced across many sectors but was most noticeable among U.S. RMBS, U.S. CMBS and European CDOs. Globally, student loan ABS, synthetic investment-grade CDOs and prime RMBS segments exhibited significant upgrades. However, a few ABS asset types such as aircraft and manufactured housing as well as the CDO of ABS sector continued to show weak rating performance during the first quarter.
The positive rating volatility observed during the first quarter of this year was relatively significant. Table 1 shows how Standard & Poor's structured finance ratings performed during the first quarter of 2005, as well as during the previous four quarters of 2004, for each region and sector combination. Chart 1 shows that 1.82% of outstanding global securities rated by Standard & Poor's were upgraded and 0.50% of these securities were downgraded during the quarter. The upgrade rate of 1.82% was higher than the 1.70% rate observed during the first quarter of 2004; this was slightly lower than the upgrade rate of 1.90% observed in the last quarter of 2004. The downgrade rate of 0.50% was lower than the previous four quarters of 2004 and much lower than the average rate of 0.82% experienced in the last five quarters.
U.S. ABS performed better this quarter than during the previous four quarters, excluding the second quarter of 2004. For instance, 1.07% of U.S. ABS ratings were lowered during the period; this was down from 5.29% during the first quarter of 2004. In addition, 0.75% of U.S. ABS ratings were raised, up from 0.13% during the first quarter of 2004. European ABS upgrades were insignificant, but the downgrade rate declined to 1.17% from 1.39% in the last quarter. The downgrades were primarily due to high downgrades of aircraft ABS. European CDOs and, to a certain extent U.S. CDOs, performed better this quarter than during previous quarters; however, the U.S. CDO downgrade rate of 1.02% was still significant. In contrast, U.S. RMBS continued to experience significant upgrades during the first quarter, and their downgrade rate was minimal. Finally, U.S. and European CMBS transactions experienced noticeable upgrades of 2.27% and 1.39%, respectively. Their downgrade rates were slightly less than the previous quarter.
Table 2 shows the number of ratings outstanding as of the beginning of this year for each sector and region combination and provides additional insight on the rating transition rates during the first quarter of 2005 and Chart 2 shows the percentage of the ratings outstanding for each sector and region combination out of the total universe of outstanding ratings as of the beginning of 2005.
Performance by Rating
On the downgrade side, higher ratings are associated with lower downgrade percentages. In other words, securities with lower ratings tend to experience higher downgrade percentages. For example, the downgrade rates were 0.20% for AAA' and AA', 0.08% for A', 0.48% for BBB', about 1% for BB' and 1.73% for B' rated securities. For upgrades, this relationship was mixed during the quarter. For example, AA' securities experienced an upgrade rate of 3.3%, and A' and BBB' upgrades were about 2.7% and 1.9%, respectively. For non-investment-grade categories, the upgrade rates were around a 2% range. Overall, the results suggest that securities with higher ratings tend to be more stable and securities with lower ratings tend to be less stable.
The majority of upgrades and downgrades during the quarter came from a few asset types. For example, about 9.6% of aircraft ABS ratings, 5.7% of manufactured housing ABS, 2.75% of cash flow arbitrage corporate speculative-grade CBO, and 2.44% of CDO of ABS ratings were lowered during the first quarter of this year. On a positive note, CMBS transactions; student loan, timeshare, and equipment ABS transactions; as well as certain CDO and RMBS subsectors, such as corporate high-yield CBO/CLO and synthetic investment-grade CDOs, alt-a, prime, and subprime RMBS categories, experienced noticeable upgrades during the first quarter of 2005.
Other subsectors either experienced modest levels of rating transitions or did not experience any rating transitions during this period. For example, auto loan ABS experienced upgrades of 0.71% and are included in table 4, but credit card ABS performance is not included, as it had a stability rate of 100%.
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