As the market had widely anticipated, Standard & Poor's removed many classes of auto lease ABS from CreditWatch with negative implications shortly after placing them on watch on May 12. S&P lived up to its claim that it would "move quickly" once it had all the relevant information for its analysis, but made no mention of the matured tranches that the rating agency had erroneously placed on watch for a downgrade.
S&P affirmed all of the tranches issued by BMW Vehicle Lease Trust, Volkswagen Auto Lease Trust and World Omni Auto Lease Securitization Trust at their current rating levels. Remaining on ratings watch are certain tranches issued by Chesapeake Funding LLC, FELCO Funding III PL, MMCA Auto Lease Trust and Provident Auto lease Trust. Additionally, the A3A and A3B classes of Nissan Auto Lease Trust 2002-A are still being considered for a downgrade.
"Apparently, S&P is conducting an additional review of our (2002-A A3A/A3B) tranches still on watch this week," said Jennifer Kuritz, Corporate Funding Manager at Nissan Motor Credit - which did not have its classes unilaterally removed or remain on watch. "We are anxious to see the final results of (S&P's) analysis and are hoping for a positive outcome."
"After having received and reviewed the pension information from certain issuers, and considering the factors outlined in its CreditWatch article, S&P affirmed various classes of notes," said an S&P spokesman. Market talk, however, was that S&P simply affirmed classes that were either issued by an entity with an unsecured credit of single-A or higher, or were scheduled to pay down within the next six months. Nissan, rated BBB' by S&P, and Mitsubishi, rated BB+', were the only issuers to have tranches fall on both sides of the fence. S&P refused comment on any speculation.
The move was applauded by the Street, which had been quick to criticize during the four days separating the watch listing and affirmation. In its most recent weekly, researchers at Credit Suisse First Boston said, "S&P simply alerted the market that over the coming weeks, it plans to reassess its view of the risk of unfunded liabilities to the issuer and the ABS trusts, nothing more, nothing less... If S&P believes risks from unfunded liabilities have indeed changed, then it should reassess them."
The initial move - tied to a reconsideration of the weight of the lien on the assets by the Pension Benefit Guaranty Corp. - stirred up a mass of criticism from Street researchers (see ASR 5/19/03). In the wake of S&P's announcement and reassessment, one hedge-fund manager reported that his fund may incorporate an updated value assessment variable to account for rating inaccuracy volatility. "After the market opened on Monday we (hedge fund partners) had a conference call and decided that we needed to model for rating agency inaccuracies," he said. This is, essentially, a policy of investor notching.
In its release - which hit after the market closed on May 16 - S&P stated that, going forward, it would take into account four factors in its assessment of auto lease securitizations. First on the list is the "investor's exposure period based on the expected maturity of the note." Also, the rating agency said it would consider the asset and liability balances of the fund in relation to the lease assets in the trust. "The materiality of the potential pension liability will be measured relative to titling trust assets and available credit enhancement to investors," S&P said. Also to be considered is the corporate credit of the seller/servicer as well as any structural features that mitigate pension fund risk, which may be built into the transaction.