In response to the growing appetite from structured finance investors and other market players for meaningful, all-inclusive statistical ratings analyses, last week Fitch Ratings released its first-ever historical ratings transition study for Fitch-rated securities, covering ABS, RMBS and CMBS issued during the last 11 years.
According to Fitch analysts, the study was the first one published in the market that tracks rating migrations for all of structured finance as a whole: in addition to breaking down the different sectors, the study also processed SF statistics on a combined basis, and on a comparable timetable for all the sectors.
The results were overwhelmingly positive: there has been a remarkable level of stability for structured finance bonds when compared to corporates. Fitch found ABS to be extremely stable, with 99.6% of triple-A rated classes maintaining their ratings over any two-year period. In fact, the study showed that rating transitions for the overall SF universe yielded a much lower level of actual downgrades compared to corporates: at the double-A level, for instance, fewer than 1% of SF bonds were actually downgraded by Fitch; in comparison, between 5% and 8% of corporates were downgraded.
Similarly, Fitch said the default rate for investment-grade SF tranches was only .02%, compared to .09% for Fitch-rated investment-grade corporates; for speculative-grade securities, the average SF default rate was 1.3%, compared to 3% for corporates.
"As these [structured finance] segments become more seasoned, this will help explain yield differences and volatility of pricing," said Mariarosa Verde, senior director of credit market research at Fitch Ratings, and co-author of the study. "In the longer term, as more statistics are accumulated, there will be a convergence of, for example, what a B' rating on a bond is. Whether it's a SF bond or a corporate, B' should have the same risk profile. Through analytics and studies such as this one, there will be further refinement, so that ratings mean the same thing across the board."
The results were nearly uniform for all sectors: RMBS and CMBS - the sectors most susceptible to the swings of the real estate markets - actually had the strongest stability, mostly due to the strong economic environment of the last decade. However, these sectors might suffer if economic conditions deteriorate or if housing prices decline; after all, the last few years of the 90s were characterized by strong economic growth and rapid home price appreciation.
"In the ABS sector, home equity, equipment leases and franchise loans showed the most ratings volatility, but that is mostly because of the competitive landscape and aggressive underwriting and lending that characterized those sectors during the 90s," said Stephanie Mah, director of credit market research and co-author of the report.
However, unlike their corporate unsecured counterparts, even speculative-graded ABS saw few downgrades, with 81.3% of double-B bonds either maintaining their ratings or seeing an upgrade. Further down in credit, the relatively small amount of supply skewed the numbers, as the bulk of ABS is rated triple-B or higher. Of the classes that did see downgrades, most (60%) were in the mortgage-related sectors of the ABS market.