Standard & Poor's recently announced that it is to wave its sovereign credit rating ceiling for asset-backed transactions.
The move represents a fundamental change in philosophy by the agency whose previous mantra held that the local currency risk should be rigidly applied to when rating ABS deals. Although the move has been welcomed as a long time coming by securitization professionals in the Asia-Pacific region, it has also been seen as a cynical attempt by S&P to boost its presence in the region.
S&P's initiative is said to reflect the fact that in certain cases and countries, the extent to how much a transaction is linked to the sovereign rating varies, and it might not be applicable to tie a deal to the country rating. This is something that both Moody's Investors Service and Fitch have already applied for some time.
Moody's, for example, has given triple-A ratings to commercial and residential MBS deals in Hong Kong because the portfolios were of such quality, that tying it to the sovereign could not be justified. And, although S&P maintains that real estate assets are still fundamentally linked to the local currency - where in adverse times, a damaged sovereign credit will have knock-on effects throughout the economy - it accepts that a certain flexibility is required.
"For a long time, where you tried to exceed the sovereign ceiling, you weren't able to, but in Hong Kong for example, in certain classes such as residential mortgages we will be able to rate deals higher," explained Diane Lam at S&P in Hong Kong. "There is still an important issue with sovereign default, because it can cause strange behavior in certain sectors, but that is something that can be now factored in to the methodology."
Lam hoped that the move would help clarify its position when rating deals and said that it had been received favorably by participants in the market. "We hope that this initiative will create more transparency as to our rating methodology," she said. "It's been welcomed: bankers are happy, investors are happy because they'll be able to see why some transactions are rated higher than others."
One investment banker in Hong Kong saw S&P's decision as a positive move on the whole, although he thought it was interesting why they had waited so long to do it. "I believe it should help transactions because we were capped by the sovereign ceiling with previous deals," he said. "Hopefully it will entice more clients to look at structured finance deals. I've got to say however that it's pretty ironic, because they haven't exactly been fair when it comes to rating deals in the region. I don't think they've rated one Korean CLO deal this year."
Another ABS professional working in the region was even more cynical. "It seems to me that it's an attempt to drum up business more than anything else," he said. "They've hardly rated a deal in Asia over the last year and have lost a lot of ground to Fitch and Moody's. This will give them a chance of rating deals in Hong Kong, where in the real estate sector, assets are as good there as you would find in Europe or the U.S. It's a little bit late in coming but it's something they needed to do."