Last Friday, Standard & Poors released its final report containing tweaked methodology for rating U.S. conduit or conduit/fusion CMBS transactions from that originally proposed.
An important change to the rating criteria is the establishment of a 'AAA' credit enhancement level. This change should allow securities rated at that category to withstand market conditions commensurate with an extreme economic downturn without defaulting.
S&P also placed on CreditWatch negative of an additional 1,1586 tranches from 209 conduit deals. This is on top of the 1,982 classes the rating agency already had on watch for downgrade.
S&Ps placement of securities on watch eliminates these bonds from Term ABS Loan Facility (TALF) eligibility.
Bank of America/Merrill Lynch analysts said that, with these changes, the question becomes whether New York Federal Reserve will make changes to TALF to make the bonds that S&P might downgrade eligible as collateral under the program.
They said that the Fed is less likely to react to the S&P changes immediately and retain the option to make changes to the TALF eligibility requirement such as switching from current to original rating criteria after the initial success of the program and its impact on spreads is gauged. With so many short, recently issued triple-As available for the TALF program, we still think that remains the likely course, analysts wrote, adding that the more seasoned bonds will be difficult to place under TALF.
However, the number of securities affected mitigate some of the negative impact from these rating changes.
Analysts estimated that around 1,557 S&P-rated conduit bonds were neither affirmed nor put on watchlist. More than 1,394 tranches across the 1995 to 2008 vintages were affirmed. Additionally, 751 super-senior bonds and 627 generic triple-A bonds are expected to maintain their rating, thus keeping them potentially eligible for TALF.
In addition to the potential impact of the methodology changes on TALF, ratings could also be affected by these modifications.
Some parts of the CMBS universe S&P rates were negatively affected by the tweaked methodology and additional or harsher downgrades have resulted. BofA/Merrill Lynch analysts predict that there could still be a substantial number of downgrades resulting from the changes.
Furthermore, some bonds that were placed on watch for downgrade under the new method would have been unaffected under the original proposal.
However, approximately 130 fewer super-senior tranches were placed on watch for downgrade than initially expected compared to the original proposal, the report said.