As largely expected by the securitization market, Standard & Poor's said today that it has lowered its long-term sovereign credit rating on the U.S. to 'AA+' from 'AAA'.
S&P also said that the outlook on the long-term rating is negative. At the same time, the rating agency affirmed its 'A-1+' short-term rating on the U.S. and removed both ratings from CreditWatch, where they were placed on July 14, with negative implications.The rating agency lowered its long-term rating on the U.S. because it thinks that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate showed that further near-term progress limiting the growth in public spending, specifically on entitlements, or on reaching an agreement on raising revenues is less probable than it had assumed previously and will stay a contentious and fitful process.
The rating agency also feels that the fiscal consolidation plan that Congress and the administration agreed to this week falls short of the amount that it thinks is needed to stabilize the general government debt burden by the middle of the decade.
The rating agency's lowering of the rating was also caused by its perspective on the rising public debt burden and S&P's perception of greater policymaking uncertainty,that is consistent with its criteria. Nonetheless, the rating agency views the U.S. federal government's other economic, external, and monetary credit attributes, which is the basis for the sovereign rating as mostly unchanged.
S&P has taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling.
Additionally, S&P thinks that the act offers enough clarity to allow S&P to examine the likely course of fiscal policy for the next few years.
In a related development, Moody's Investors Service on Tuesday confirmed the U.S. 'Aaa' government bond rating, although the agency maintained a negative rating outlook. It also confirmed the 'Aaa' ratings of securities directly linked to the U.S. government bond rating such as FFELP-backed student loan ABS.
The difference between S&P and Moody's has resulted in a split rating situation that analysts said previously will almost be a "non-issue" for structured finance products.
In the ASR issue for August 2011, the article called U.S. Downgrade Impact on MBS Depends on Govt.'s Ability to Pay stated that many MBS analysts believed that not being able to raise the debt ceiling was a bigger issue in terms of agency MBS than a U.S. sovereign downgrade would be.
Prior to the debt ceiling resolution this week, Credit Suisse analysts said that the government backing for agency MBS does not change regardless of the outcome of the debt ceiling talks or a U.S. sovereign rating downgrade. The only problem is, they said, is that the government might have to prioritize payments, which means placing other obligations ahead if there is no debt deal reached, which serves as the main risk to MBS buyers.
In terms of the general structured finance market, S&P had said before today's downgrade that the negative watch actions it had made have impacted only a small portion of structured finance securities that S&P rates.
The agency also said in a statement that most structured finance securities are supported by collateral whose credit quality is not directly linked to the U.S. government's sovereign rating.
"Even if there is a sovereign default, it does not prevent the issuance of triple-A securities," said Robert Chiriani, senior director in structured credit surveillance at S&P. "There is still the ability to do so throughout the securitization sector in auto and credit cards, for instance. The overall impact is under 4% - it's a very small portion of structured finance deals that we rate that are actually potentially affected."
There also might be some instances where the negative outlook on government-related securities or a sovereign downgrade can be mitigated.
"There may be a situation where a note linked directly to the government will not be impacted by the change in the U.S. rating and can maintain its triple-A rating by excluding sovereign support," said Gary Kochubka, senior director in ABS surveillance at S&P. "We would have to see if there might be circumstances that this can happen."
