The decline in ReRemic issuance and ratings downgrades in the non-agency space means investors have less investment grade assets to buy at a time when many prefer to seek refuge in this safer haven.
According to a report by Bank of American Merrill Lynch, amidst the latest financial crisis investment grade paper has continued to enjoy strong support and liquidity. Many of the outstanding investment grade tranches are either seasoned or backed by stronger prime fixed collateral.
While some investors may be mandated to invest in investment grade assets other investors, such as banks, have moved up the credit spectrum voluntarily as they look to avoid the constraints of the more onerous capital requirements for non-investment grade assets.
BofAML analysts report that$187 billion remains in investment grade tranches. About 24% of the jumbo sector is investment grade compared to only 8%, 1%, and 12% of alt-A, option ARM, and subprime tranches outstanding, respectively.
Of the alt-A tranches issued before 2008 which were originally rated triple-A, $347 billion remains outstanding. However, of those, only 1.5% remains triple-A and 8.5% investment grade with the majority of the tranches having been downgraded to triple-C or lower.
And analysts said that lower volumes in ReREMIC issuance is also a factor behind the decline in investment grade paper. This year, there has only been about $20 billion of ReREMICs issued, according to BofAML, of which only $10 billion was rated investment grade (the remainder was not rated).
"This compares to $54 billion issued in 2010 where $34.6 billion was rated investment grade. In addition, a large portion, $7.5 billion, of the deals done this year have come from the NCUA," explained BofAML analysts in the report. "The decline in ReREMIC activity is primarily due to changes in rating agency criteria in conjunction with market pricing which has made the arbitrage unattractive."