Standard & Poor’s is considering criteria changes that would make it more difficult for a structured finance transactions to earn a rating above the "sovereign ceiling," or the rating of the nation in which it is domiciled. The proposed criteria would cut the maximum ratings differential to four notches from the current six, in most cases.

If adopted as proposed, the biggest impact would be in European securitizations, where most rating differentials would be reduced by two notches, to four from six. 

“The proposed criteria will have the greatest effect on securitizations in Europe because, with the application of the current criteria, we currently have the largest rating differential between top rated securitizations and sovereigns,” said the ratings agency.

S&P cited a number of reasons for the proposed changes, including the increased country risk sensitivity for countries in a currency union (Greece, Portugal, Spain, Ireland etc.); and higher level of tail risk on sovereign distress or default (including exit risk from monetary union or capital controls / deposit freezes).

The proposed approach would continue to allow structured finance ratings to be above the sovereign but the maximum differential would be "based partly on the sovereign rating (‘AA-’and above, or ‘A+’ and below) and partly on the sensitivity of the asset type to country risk," according to a Royal Bank of Scotland securitization report.

S&P plans to apply 'high sensitivity to transactions linked to public sector assets, sovereign or bank/insurance exposures, and 'moderate sensitivity' will be applied to other ABS, RMBS, CMBS and SME CLOs.

“A six notch differential would still be possible for senior notes in non-CLO sequential pay transactions, backed by a pool of 'moderate country risk' seasoned/short-term assets with stable payment characteristics, no refinancing risk, liquidity cover for at least one interest payment, credit support sufficient to 1.3x current ‘AAA’ loss projections and a sovereign rating of at least ‘BBB-’,” explained Phil Adams, senior strategist for ABS & MBS at RBS.

In Spain, approximately 50%-60% of ratings on RMBS, ABS, SME CLOs, covered bonds will be lowered by two notches, according to S&P.  Approximately 40% of ratings on Spanish CMBS will be lowered by five to six notches.

In Italy, approximately 60%-70% of ratings on RMBS and ABS will be lowered by two notches. Approximately 40% of ratings on CMBS and approximately 95% of ratings on covered bonds will be lowered by two notches. All of S&P’s ratings on Italian SMEs will be lowered by two notches.

In Portugal, approximately 60% of ratings on RMBS and ABS will be lowered by one to three notches.

“Our ratings on most [Portuguese] SME CLO classes will be lowered by four to five notches,” said S&P. “We expect about half of the RMBS and ABS ratings and all of these SME ratings that are affected by this proposed criteria in Portugal will be lowered below 'BBB-'.”  

In Ireland,  approximately 20% of ratings on RMBS to be lowered by one to three notches.


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