Though not specifically addressing - or even mentioning - notching policies, Nomura Securities last week revealed a 36 page research report on trans-agency, trans-asset class ABS ratings migrations, which will almost surely be absorbed into the notching tug-of-a-war.

That's because the current sentiment, over what is and what is not appropriate notching practices, is starved for more research into the differences in performance of structured finance ratings from the three major rating agencies, Standard & Poor's, Moody's Investors Service, and Fitch, each of whom approach credit rating uniquely.

Through its analysis, Nomura comes up with a myriad of statistical bullet points, such as "Deals rated by both Moody's and S&P experienced lower frequencies of adverse credit events than deals that lacked ratings from either," or "For deals rated by only one rating agency, Fitch-rated deals had the lowest frequency of downgrades and Moody's-related deals had the lowest frequency of defaults and near defaults."

For those interested in notching, the rating agency component of this report will no doubt be insightful; though, as admitted in the study itself, interpreting the results of this section is a "perilous undertaking."

"Readers are cautioned to refer to part IV, which describes some of the problems and limitations in doing so," writes report co-author Mark Adelson, head of structured finance research at Nomura.

With that in mind, according to the frequency charts (see below), from a default perspective, Moody's fairs best, with the lowest percentage of its deals moving into default. The results across the board are somewhat mixed, as are the data cuts. The study will, for example, remove all monoline triple-A wrapped tranches from its universe of deals, producing a different frequency analysis. Also, whether or not Hollywood Funding is included in the universe of deals significantly effects the performance statistics for S&P-only deals.

Arguably the most conclusive portion of the report is the section on migrations across asset classes independent of rating agency. Here, Nomura confirms that bank credit cards, prime autos, student loans, utility receivables and even (pre-9/11) pooled aircraft ABS have experienced only slight ratings volatility.

In fact, prior to Sept. 11, not one of the 65 aircraft receivables deal reviewed by this study had been blemished.

Nomura's study classifies credit events in four ways: default, if an investment grade tranche actually experiences payment default or is downgraded to default status; near default, if any investment grade tranche falls below the triple-C level; major downgrade, if any triple-A tranche is downgraded, or if any investment grade tranche is downgraded to double-B-plus or lower; minor downgrade, if any tranche has been downgraded but does not fall in above categories.

For a full copy of this report, contact James Manzi at 917-639-4149.

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