Moody's Investors Service on Wednesday finalized its methodology for structured finance interest only securities.
The rating agency published a 'request for comment' on its plan to change its rating process for this sector in late November 2011.
According to research published today by Bank of America Merrill Lynch analysts, despite the shift new-issue XAs, which are stripped off 'Aaa' classes, will stay at the 'Aaa (sf)' level.
Meanwhile, new-issue XBs, which are usually stripped off tranches rated 'Aa (sf)' through those that are not rated or NR, will be given a below-investment-grade rating capped at 'Ba3(sf)', noted BofA Merrill analysts.
Additionally. the ratings on many PAC and single-bond IOs will stay the same. The support IOs such as legacy support IOs that reference only bonds not referenced by the PAC IO will be rated 'C(sf)', noted BofA Merrill analysts.
The WAC IO ratings will be adjusted to the lowest of either 'Ba3 (sf)' or the highest current tranche rating on bonds that are outstanding. These bonds are backed by the referenced pool. The adjustment can potentially be applied to the rating corresponding to the pool's expected loss such as realized losses.
However, Moody's statement said that: "The rating of the PAC IO is the current rating of the most senior referenced bond provided that (i) principal paydowns, recoveries, or losses have not eroded the originally planned notional balance schedule; and (ii) the reference schedule aligns with Moody's view on future pool performance."
According to BofA Merrill analysts, to the extent that the rating agency expects a pool's performance can considerably deteriorate, this might mean that a situation might arise where a PAC IO can possibly be downgraded to below 'AAA (sf)'.