Standard & Poor's downgraded 14 classes of auto lease ABS issued by Mitsubishi Motor Credit of America last week, due to greater-than-expected defaults of the captive lender's zero-down, zero-interest and zero-payments for 15 months subvention loan strategy. The balloon payment loans had long given investors concerns, for which Mitsubishi had paid up with significant spread premiums in the primary market.

S&P's downgrades, however, of as much as four notches on some senior bonds, were more severe than had been anticipated and took a little longer than had been expected, after S&P placed the tranches on review for a downgrade in late March. For example, the outstanding senior tranches of the 2001-3, and 2002-2 series were cut to A+' from AAA' and 2001-4 and 2002-1 series were cut two notches to AA' from AAA'. Subordinate classes were also downgraded by one to three notches, the most severe being the 2002-2 series, which saw the B class cut to BBB-' from A' and C class cut to BB' from BBB'.

S&P blamed the downgrades on MMCA's lax lending policies, compared to the "level-pay" loans MMCA had traditionally made. Additionally, the balloon structure of the loans increased severities on defaulted loans, which had yet to make a payment.

Mitsubishi had previously injected cash to support the trusts, having added more than $67 million to reserve accounts last year. Additionally, sources speculated that Mitsubishi could have avoided these downgrades by further injecting cash to the reserve accounts, something few thought MMCA would continue doing. "We believe it highly unlikely that MMCA will bolster the reserve accounts to maintain the current ratings," said Barclays Capital in a research report issued following the deals being placed on review.

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