A handful of managers are tweaking RMBS deal structures in order to achieve a Moody's Investors Service triple-A rating on super senior tranches they would not be able to obtain otherwise. The structural nuances essentially burrow the so-called senior support tranche into a more subordinated position in order to protect the super senior tranche. At least for the deals that have been rated so far, the senior support tranche and other senior interest would not receive a triple-A rating per Moody's rating methodology, but that's not to say the manager could not shop around for one.
While the rating agency would not confirm, it would appear as though managers are bypassing a lower rating from Moody's for the senior support tranche and other senior classes for triple-A ratings achieved elsewhere - a move that could be confusing for investors who think all triple-As, and senior classes for that matter, are created equal. Moody's rated four or five such deals in the fourth quarter, and inquiries continue to trickle in. "Senior class investors need to be aware of these differences," said Joseph Grohotolski, a vice president at Moody's.
A super senior class protected by a $10 million subordinate class and a $5 million senior support class in such structures could achieve the same Moody's rating as a senior class protected by a $15 million subordinate class. In order to squeeze extra support to the super senior tranche, the senior support tranches in the deals are allocated losses first, after the deal's subordinate bonds have been depleted, according to a Moody's report released last week. In fact, super senior tranches would not take a loss until the corresponding senior support tranches were depleted entirely.
If losses in such a deal were to exceed the balance of the subordinate class, the senior support tranche would absorb its pro-rata share of losses, along with the super senior tranche's share. Meanwhile, the other senior tranches in the deal would absorb their own pro-rata share of losses. Although prepayments are typically allocated to just the senior classes for the first five years, the twist here is that the senior support tranches prepayment allocations are sent directly to the super senior tranche. During this time period, remaining senior classes would receive their own pro-rata share of prepayment allocations. After the deal's step-down date, prepayments would gradually flow to the senior support tranche, along with subordinate tranches.
Variations to the structure include: the senior support tranche receiving a pro-rata share of prepayments since inception of the deal, sequential allocation of prepayments to, and commencing with, other senior classes, and looser performance triggers allowing early prepayment allocations to the senior support tranche, according to Moody's.
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