Standard & Poor's plans to revise its ratings methodology for U.S. securitizations of mortgage servicer advance receivables.
In a request for comment published on August 14, S&P said the changes could result in upgrades for potentially 20% of the servicer advance deals that it rates and downgrades for another 30%. The average movement in ratings is expected to be one to two ratings categories; deals with high fixed-rate coupons or those with floating-rate coupons would likely be most vulnerable to downgrades.
S&P has proposed to revise its methodology reimbursement timelines for advance receivables based on historical loan-level performance data. Timelines are further adjusted based on the actual recent experience of the servicer in recouping advances.
The proposal also includes a more stringent liquidity reserve requirement for each series of servicer advance ABS that is dependent on the geographic diversification of receivables in the master trust, according to a Barclays report.
Haircuts will be applied against advance receivables that do not have a general collections backstop, as well as receivables that do not have a first- in/first-out reimbursement policy. However advance receivables that benefit from a general collections backstop are assumed to be fully recoverable under all scenarios.
The ratings agency is also looking to cap weighted-average advance rates across each ratings category. S&P plans to close the comment period on the proposed methodology change on Aug. 28, 2014.
In a report on the proposal, Barclays said that issuers that might potentially be negatively impacted could opt to increase credit enhancement levels or the required size of the reserve funds in the affected series to mitigate any negative ratings effect on the notes.