Standard & Poor's rocked the boat last month when it offered an unsolicited take on Redwood Trust 's private mortgage bond deal.
For a rating agency to weigh in on a deal without officially rating it — and to assert that the bonds would not have received the agency's highest mark — was unusual.
Moody's Investors Services had given the senior bonds in the securitization — the first of its kind in two years — a triple-A rating, noting the high credit scores and incomes of the borrowers and the substantial documentation obtained in the underwriting of the loans.
At the time, S&P would not say whether or not it had been approached about rating the securitization. And neither Redwood nor Citigroup, which made the loans and underwrote the deal, would discuss the matter. This week, however, investors got more clarity. Turns out, it was a matter of timing.
"We wanted to have S&P involved in the transaction, and in order to get the transaction to close last month, they could not meet our deadlines," Brett Nicholas, chief investment officer and co-chief operating officer of Redwood, said in an investor presentation Tuesday. "But we want S&P involved. We will continue to work with them, because we need more rating agency involvement here."
S&P spokesman Edward Sweeney did not dispute or corroborate Redwood's account, but he said S&P is "committed to serving the market with timely opinions on credit risk."
Its move to weigh in on the transaction without rating it could become more the norm as agencies refine their ratings requirements and implement stricter standards to avoid conflicts of interest.
"Standard & Poor's may, from time to time, choose to provide our views on structured finance transactions across various asset types and geographies, even if we did not rate the transaction, if we deem the transaction important to the market and we believe that our opinions would provide value to investors," the company said in its note on the Redwood deal.
Ultimately, that's good for the market, said Michael Youngblood, founder and principal of Five Bridges Advisors, noting that an overreliance on ratings agencies got investors into trouble in the past.
"Institutional investors must be able to make their own credit decisions about ABS securities," he said. "One hopes that greater disagreements by ratings agencies will illuminate this necessity."