It was in the stars, some analyst might say of the recent downgrade of U.K.-based residential mortgage-backed security (RMBS), Stars 1.

While the post-Sept. 11 market has been embracing RMBS structure, which has been designated as a safe haven by market analysts, the breakdown of the insurance industry has caused enough shockwaves that potentially could seep into many other areas, beyond RMBS.

One analyst familiar with the situation explained: "This downgrade had nothing to do with the pool; it was due to the exposure the deal had to the insurance industry."

To be sure, the ratings action follows a timeline that starts with the lowering of the counterparty credit and insurer financial strength ratings on various operating entities of the U.K.-based Royal & Sun Alliance Insurance Group, which was counted among the hardest-hit reinsurers following the American Airlines jet crash near John F. Kennedy airport in New York City. Shortly after the crash, the FTSE Eurotop-300 insurance sector fell 4% and the multiline reinsurer was later downgraded to a single-A-plus from a double-A-minus.

Sun Alliance & London Insurance Plc falls within those operating entities that are affected and has likewise suffered a downgrade to single-A-plus. Since it provides a mortgage pool indemnity policy that supports Stars 1 PLC, the transaction subsequently suffered a one-notch downgrade as well, to single-A-plus from double-A-minus.

Stars 1 is a pool of fixed-and-variable rate endowment, pension-linked and deferred payment mortgage loans secured on residential properties in England and Wales, originated by Citibank Trust Ltd. "It's unlikely that further downgrades will be stimulated as there are no other transactions with a similar structure," said one analyst at S&P.

However, the downgrade signals that transactions that have a vulnerability to certain insurers won't be able to escape the axe, which is more likely to fall upon the "jack-of-all-trades" multiline insurer. One analyst noted, "It all depends on who is providing the protection, because obviously there are those that are good and those that are weaker. Most public transactions, though, are wrapped by triple-A monolines, and at present we do not expect monolines to be downgraded.

"On the other hand, some deals affiliated with multilines could be vulnerable; because of the nature of a multiline most don't need a triple-A rating - it's not as frightening to them to be downgraded."

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