Asset-Backed debt, like car loans, student loans, and credit cards, is becoming increasingly riskier as the banking crisis eases it’s hold on the global economy, according to Moody’s. This is due in part to the loosening of the underwriting standards, structures becoming more intricate, and untested market participants.
Underwriting Requirements Easing Off
With the underwriting standards being backed off in areas such as auto loans, and other riskier ventures, the credit rating companies need to pay heed to the standards, and start assigning appropriate rating levels to these bonds. For the weaker securities, there should be features to offset the risks before the much sought after triple A rating can be assigned to the bonds in question.
Claire Robinson, the new-issue structured finance ratings head at Moody’s, and author of the report that was published, said that “We want to make sure that the credit protections that investors have keep pace with the evolution of the market.” She went on to explain that the loosening of the standards is a natural reaction to the recovery from the credit crisis, but as the credit eases, investor protections must be protected.
Credit Easing Off – But High Ratings Still Prevail
If the nature of the cycle is realized, then the credit easing will keep going on into 2012. And while originators are easing the requirements, areas like the sub-prime auto loan secularization are steadily returning to pre-recession normal levels. Loan pools backing up auto ABS are bound to start seeing more losses. But investors can offset these with the standard methods of credit enhancements, and buffers.
In spite of the ongoing recovery and Congressional scrutiny, Moody’s competitors are still issuing unwarranted AAA’s. One sub-prime transaction issued by Exeter Finance Corp received higher ratings than Moody’s would have given it…and even these high ratings didn’t agree with each other. The S&P rated the deal at AA, while DBRS rated it at AAA. On Feb 23rd the deal priced at $200 million. All the while Moody’s claimed that, “The resulting potential for volatility in asset performance makes high invest-grade ratings inappropriate.”
Other Bad Ratings – According To Moody’s
But that wasn’t the only credit ratings that were issued recently that Moody’s considers flawed. Credit card bonds sponsored by senior issuers like World Financial Network, Cabela’s, and 1st Financial wouldn’t deserve the AAA rating. Also on the list was the entry of hedge funds, investment banks, and private equity funds into the sub-prime mortgage and auto business is a large red flag.
The Good News
The good news is that the year-to-date volume is up by approximately $15 billion to $45 from the 2011 figure of about $30 billion. This puts the market on a course to complete the year over lasts years final of $125 billion. Also, at least 4 deals were up-sized this last week because of demand or over-subscriptions, and there was larger than expected bid lists, increasing trading in the secondary markets. If investors are careful, then trends are suggesting that the ABS market is set for stronger growth…the first growth of the ABS market since the onset of the crisis.
Let us know what you are thinking about these late developments. Send us a tweet to: @managedaccts.
