Standard & Poor’s today released revised criteria for monitoring the performance of existing U.S. RMBS, specifically for 80% of outstanding ratings that were originated prior to 2009.
In a conference call today, Vandana Sharma, managing director and lead analytic manager for U.S. RMBS ratings, said that the updates considered tail risk and stressed the backend of the structure.
Overall the rating agency expects the updated criteria’s implementation to lead to more rating downgrades than upgrades. The firm also expects the rating actions for this particular sample will display a more negative bias than for the portfolio at large.
The criteria, which is effective immediately, integrates updated assumptions regarding collateral performance, changes in pool-level credit and cash flow analysis, and applies new methodologies for capturing risks associated with a deal's mortgage pool comprising less than 100 loans.
Analysts conducted an impact study of 512 transactions accounting for roughly 10% of the rated offerings for which the criteria applies. The results showed that the majority of the ratings — roughly 68% — stayed within three notches of their current rating.
Additionally, nearly 2% of ratings will be upgraded by four or more notches, while roughly 30% of the ratings will actually be downgraded by four or more notches. Specifically, roughly two-thirds of the rating movements involve lowering the ratings from ‘CCC’ to ‘CC.’
S&P noted that the sample’s data is somewhat slanted toward transactions from cohorts where they have raised their base-case projected losses.
The rating agency also identified five key changes in ratings under the updated criteria. The first was that the ratings on cohorts where the base-case loss projections have been raised have the greatest probability of being lowered.
Also, the firm stated that higher ratings have a greater chance of being downgraded than lower ratings. This is related to the application of higher stress multiples and the introduction of stability tolerances within the stress multiples for ratings in the 'A' category and greater as well as the execution of more burdensome cash flow assumptions at the higher rating levels.
S&P said that securities that are presently rated 'BB+' and lower, particularly ’CC’ securities, are more likely to be higher because these criteria only apply the "standard" liquidation curve to ratings below 'BBB-.’
The firm also projected that the pro-rata pay securities in transactions backed by fewer than 100 loans are more prone to be downgraded, exhibiting the introduction of the tail risk criteria.
S&P expects that securities currently rated 'AAA' in transactions that have pro-rata pay mechanisms and do not profit from a credit enhancement floor or an equivalent functional mechanism will not be rated higher than 'AA+' to signal the sharp event risk that these securities may be exposed to at the very end of the transaction.
Since the agency not be placing ‘CC’ and ‘CCC’ rated tranches on credit watch, those rated ‘B-‘ and above will progressively be put under Credit Watch, Sharma said during the Q&A session of the conference call.
She added that the agency will give more insight as more of the Credit Watch actions are resolved. The rating agency expects to review all in-scope transactions and to report its findings within the next six months.