Tomorrow the European Central Bank (ECB) is set to extend its minimum two-rating requirement for all existing ABS to remain repo eligible at the central bank’s window. This effectively ends the grandfathering period that started a year ago.
The future rating criteria establishes that bonds must have at least two triple-A ratings at launch and maintain at least a single-A minus or higher to be repo-eligible.
"The ‘race to compliance’ looks to be very last minute all things considered, seeing as these new ECB rules were flagged in November 2009," said analysts at the Royal Bank of Scotland (RBS).
Banks in countries such as Italy, Spain and the Netherlands, according to RBS, make up over 70% single-rated retained bonds.
Among bank names that have retained ABS outstanding with only one rating are ING (and its subsidiaries), Intesa, Irish Life & Permanent and BBVA, which represent the top four bank originators based on RBS data. These institutions have a total of €72 billion of potentially ineligible retained bonds between them.
However, it is likely that a last minute push by banks to fall in line with the new two-rating criteria will make the volume of single-rated ineligible paper shrink ahead of tomorrow's deadline. According to a Bloomberg report, around €85 billion worth of retainedABS bonds had already gained additional ratings in the last full week of February.
The concern, however, is that this sudden rush from banks to get the additional ratings will create a "ratings bottleneck" that could mean some ratings requests will not meet the upcoming deadline, RBS analysts said.
They explained that banks looking for additional ratings will be faced with more contemporary agency methodologies that extend beyond collateral considerations to the profiles of counterparties and supporting ratings of the seller – and, in some cases, sovereigns – as well. For some deals, it could mean further credit enhancement and tighter deal language.
RBS analysts said that in the case of KBC Ireland (as announced on Feb. 22) its second rating from Fitch Ratings for its three retained securitizations, Phoenix 2,3 and 4, required additional enhancements through subordinated loans for Phoenix 1 and 2 to achieve single-A ratings. These are compliant with the agency’s double-A cap for Irish securitizations reflecting a maximum five-notch uplift over the sovereign.
Overall, more than 65% of the outstanding ECB eligible securitization volume will continue to qualify as ECB collateral as of March, Unicredit analysts reported.
For banks with single-rated retained securitizations that will not seek a second rating, another alternative would be to restructure retained deals into term funding that would be syndicated into the investor base.
"The depth and clearing price of primary demand currently would be key considerations of course," RBS analysts said. "However, we suspect only benchmark issuers in vanilla asset types would have such ready market access, moreover a second rating would still likely be required for best execution."
These banks could also opt to tap the private markets using existing or restructured stock of retained ABS. This option, RBS analysts said, would be the best alternative when obtaining a second rating that is ECB-compliant is simply not possible without uneconomic structural support, credit enhancement /subordination levels. It is also the best choice when two or more existing ABS ratings are in breach of the central bank’s minimum criteria.
"Most Greek securitizations fall into this category, with a number of Irish asset-backed bonds also likely to face such risks before long, in both instances given the sovereign and/or seller rating ‘ceilings’," RBS analysts explained. "We are not privy to the terms of private repo or collateralized liquidity trades, however should these be competitive versus the ECB liquidity provision (noting particularly that the current full allotment, fixed rate regime is likely to end soon), then we would expect broader interest in such private market transactions, even from selected banks with continued ECB access."
