Last week Moody's Investors Service announced it would reassess its ratings on transactions it deems to have, "trustee risk," or risk associated with a trustee whose understanding of its role and responsibilities is different than Moody's understanding.
In the past two years, subjective factors have crept into the credit analysis of ABS, such as "intention risk," "willingness-to-cheat-risk," "integrity risk," and other non-quantifiable aspects generally associated with the seller/servicer. While non-quantifiable, these risks could still possibly be structured out of the picture by adding certain watch guards to the documentation, some of which Moody's had assumed were already there implicitly.
Sources attending the ABS West securitization industry conference in Phoenix, Arizona last week said that some attendees publicly berated Moody's analysts for, as one source reported, "terrorizing the market" with its new comments about trustees. (The performance of both trustees for National Century Financial Enterprises (NCFE), J.P. Morgan Chase and Bank One Corp., has come under fire.
According to an official who attended the opening panel session of the conference, Daniel Stachel, of State Street Investors, was one of the most vocal critics. Stachel, however, is notorious for antagonizing rating agency officials during the opening panels of industry conferences.
While agreeing with Moody's assessments of trustees, some ABS market players said that the rating agencies equally dropped the ball with the NCFE situation, but seem to be diverting the blame on the trustee side.
Still, it has blatantly demonstrated to market observers that the current system of ABS trustee protection has serious flaws, as investors are left to wonder why deal trustees J.P. Morgan and Bank One failed to notice inconsistencies and cash flow violations before it was too late.
Fitch, which also rated the NCFE deals in question, said it does not view the current trustee situation as a major crisis. "We don't think it's necessary to be alarmist," said Kevin Duignan, a Fitch managing director. "For the most part these are not new issues."
Moody's said it has found great variance between what the rating agency expects a securitization trustee's role to be, and what those trustees believe their role is. The difference at times is a vast chasm, as Moody's discovered that some trustees view their role to be almost entirely reactive.
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