Bank One Capital Markets called the move "somewhat haphazard." JPMorgan Securities called the move "sloppy in execution and bordering on reckless in terms of understanding the market impact." The Street reacted harshly to Standard & Poor's placement of 32 classes of auto lease ABS - including three that are no longer outstanding - on watch for a downgrade last Monday, due to potential exposure to federal government entity Pension Benefit Guaranty Corp. in the event of a seller bankruptcy.
The announcement spurred a flurry of bank research criticizing the rating agency, and prompted both Fitch Ratings and Moody's Investors Service to issue clarifications on their respective stances on the issue. Both confirmed they were comfortable with the risks associated with potential PBGC action on auto lease ABS. "Moody's has looked at this risk from a deal's inception and it has been part of our approach to rating this asset class all along," said Moody's Managing Director Michael Kanef.
As of press time, investors had not dumped their auto lease ABS holdings, as few trades had been reported, but noteholders of tainted paper did report quotes up to 10 basis points wider when calling to mark their positions.
For its part, however, S&P called the criticism "a severe overreaction," adding "the highly liquid pool of assets would be like a honey pot for the PBGC in the event of a seller bankruptcy." Rating analysts Michael Binz and Felix Herrera of S&P said "the move to place the deals on negative watch was to let the market know that we were conducting a review of certain auto lease transactions." A lag time between surveillance reporting on some of the recently matured tranches and their being placed on watch was to blame for the error.
"There were matured securities listed in the press release," said Binz. "That is a valid criticism. Those securities should have been moved to NR status in our database but were not."
"Given the current landscape, with the increasing frequency of unfounded pension liabilities and these assets not being perfected to noteholders, we felt a need to look at the auto lease sector on a deal-by-deal basis," said Binz, a director in S&P's consumer asset rating group. While the persistent downturn in equity markets has led to a number of distressed plan terminations, nothing in particular triggered the change in methodology, he said. "The timing could be viewed as strange if it were five years ago when most pension funds were fully funded," added Binz, "there are many institutions looking at pension fund issues right now."
Additionally, Binz said that just because the deals are on watch for a downgrade, a downgrade may not be imminent. "We have requested certain updated pension plan related information from the plan sponsors, and we intend to move quickly once we have all the relevant information for our analysis. And we were also careful to note in our release that if downgraded, most new ratings would be within one category of the current rating," added Binz.
The review process is expected to take roughly two months, with the short-dated tranches scheduled to be looked at first. Speculation was that many of the money-market tranches would likely be retired by the time S&P completes its analysis.
The criticism, from sell-side analysts, issuers and investors was focused primarily on the timing and the lack of notice prior to the announcement. "The only notice we got was a phone call a couple of hours beforehand," said Jennifer Kuritz, corporate funding manager at Nissan Motor Credit, which securitized $1.08 billion of auto leases last November. Apparently S&P was comfortable with the funding of Nissan's pension at the time. "This (announcement) really came out of leftfield," said Kuritz.
Kuritz confirmed that S&P is currently analyzing Nissan's pension data, but added that "we wish they had done this analysis beforehand."
"S&P is asking questions now, after the fact, and in the meantime has put a cloud over auto lease ABS, a sector that we at Nissan feel very comfortable with," she added.
"Particularly troubling about this sudden rating action is that S&P has not established material and tangible evidence of additional risk exposure for each transaction, and appears to be unaware that taking this action likely arouses negative sentiment for an entire ABS asset class," said researchers at JPMorgan, who also point out the BMW Vehicle Lease Trust 2000-A A3 and A4 classes as well as Centant Corp.'s Greyhound Funding 1999-2 deal are both no longer outstanding.
Banc One adds, "As a practical matter, there is really very little risk here. Remember there are three conditions that would need to be met before the PBGC would even be in a position to attempt what S&P fears: a firm has to have a defined benefit program, the plan has to be underfunded, and the firm must be in severe enough financial difficulty that (it) can't commit additional funds to the pension."
Barclays Capital recommended a buy on any cheapening of auto lease ABS following S&P's move. "We believe many of the transactions will pass muster upon closer and more thorough examination by S&P. Furthermore, any spread widening in auto lease ABS represents a good buying opportunity, as we expect these issuers to emerge unscathed from CreditWatch," penned Joseph Astorina, a former Fitch analyst, in the Barclays research group
To keep things in perspective, however, the Street, has not always seen eye-to-eye with the rating agencies on every action. Most notably, after Fitch downgraded certain classes of ABS issued by National Century Financial Enterprises last July, one sell-side research team put a buy recommendation NCFE ABS experiencing any "Fitch-induced widening."