Moody’s Investors Service downgraded several key U.S. banks late Thursday, impacting the ABCP operations of these banks.

Among the banks that Moody’s downgraded include JPMorgan Chase, Bank of America Merrill Lynch, Morgan Stanley, and Goldman Sachs. 

In February, Moody’s had placed a broad range of banks with global capital market operations and European banks on review for downgrades. In May, it released new ratings for banks in certain European countries.

Late Thursday, it released new ratings for banks with global capital market operations, including many of the biggest U.S. banks.

In terms of the asset-backed market, the downgrades included banks that have ABCP programs such as Citibank and The Royal Bank of Scotland (RBS), both of which had their short-term rating downgraded to ‘Prime-2 (sf)’ from ‘Prime-1 (sf).’

In fact, as a result of the downgrades on RBS, the rating agency today also lowered to 'P-2' the ratings of the ABCP issued by Abel Funding Pty. Limited /Tasman Funding Incorporated (Abel/Tasman) and George Street Finance Pty Ltd (George Street). The rating action follows the downgrade to 'P-2' of RBS Australia, the programs' sponsor and administrator that is now rated 'A3'/'P-2.'

The downgrades will further chip away at the ABCP investor base, specifically money market funds, which is the biggest chunk of ABCP buyers, various sources said.

According to Sean Collins, a senior economist at the Investment Company Institute, as of February 2012 MMFs held $121 billion in ABCP. This means that they hold about 36% of the total ABCP outstanding. For further information on this issue, please see ASR's cover story for its July issue.

For the European market, many European ABCP conduits are fully supported by a bank sponsor, often with a liquidity line or letter of credit that can be used to ensure repayment of paper if the paper can't be refinanced.

If the bank providing this support is downgraded, the ratings of the ABCP it supports might be affected as well, according to Moody's Managing Director Thorsten Klotz at an interview at the recent ABS Global 2012. With the bank downgrades, clearly the universe of ‘P1’-rated ABCP has shrunk, he added.

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