Tag Archives: Moody

Rating Agencies Have Stopped Rating – Bond Markets Shutting Down

The three dominant credit-ratings providers have made an urgent new request of their clients: Please don’t use our credit ratings. The odd plea is emerging as the first consequence of the financial overhaul that was signed into law by President Obama on Wednesday.

“The repeal of Section 436(G) of the Securities Act of 1933 is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions.”

Barclays Capital


It already is creating havoc in the bond markets, parts of which are shutting down in response to the request, The Wall Street Journal Reports.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days.

This is the direct consequence of a new law, in particular a small paragraph that made it into the law in the very last moment.

Yesterday morning, the Econotwist’s subsidiary site “The Swapper” reported:

“The repeal of Section 436(G) of the Securities Act of 1933 — what the Wall Street Journal in an article this morning called an “unintended consequence” of the Dodd-Frank Wall Street Reform and Consumer Protection Act — is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions,” according to Barclays Capital analysts.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not,” Barclays says.

With difficulty assessing this new liability, Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have already pulled back from the new-issue securitization market, The Swapper reports.

Barclays analysts expect this to impact consumer ABS more than residential credit ABS, where issuance volumes have been generally lower and issuance that has come to the market has generally been privately placed as 144A deals.

Go to The Swapper to read the rest of the article.

Rigid With Fear

Now not only the agencies have a big problem. The issuers are also rigid with fear, the wsj.com, writes.

Many companies that were in the process of securitization of their loans are now holding back.

The registration with the SEC is on many financial products – especially those composed of consumer loans such as mortgages and car loans – a written evaluation by an agency requirement.  These are now refused.

Liable For Their Ratings Decisions

The new law will make ratings firms liable for the quality of their ratings decisions, effective immediately.

The companies are now refusing to let bond issuers use their ratings until they get a clearer understanding of their legal position and no one knows how long this will take.

Many structured products cannot be issued now, as the law obliges them to include a rating in the documentation.

That means new bond sales in the $1.4 trillion market for mortgages, autos, student loans and credit cards could effectively shut down, The Financial Times Deutchland reports.

“We are experiencing a standstill,” Edward Gainor, one on asset-backed securities specialist lawyer, says .

While there have been were traded bonds worth $3 billion over the last weeks, there were no new issues this week, according to The Wall Street Journal.

How To Create A 3 Trillion Dollar Bubble And Burst It

SEC To Take Action Against Moody’s

E.U. Prepared To Set Up Own Rating Agency

Moody’s May Be Downgraded by Standard & Poor’s

Fitch Gives EU Bailout Tripel-A Rating

ECB Makes Rating Agencies Irrelevant

Killing My CDS Softly

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Spec-Grade Liquidity Worsens

Speculative-grade liquidity has worsened this summer for the first time in 15 months, according to a report published by Moody’s Investors Service.

“The increase in the past six weeks suggests that a long period of improving liquidity for spec-grade companies may be drawing to a close.”

John Puchalla


The liquidity stress index rose to 5.5% in mid-July from 5% in June and 4.8% in May, after 15 months of declines, Moody’s report.

“The increase in the past six weeks suggests that a long period of improving liquidity for spec-grade companies may be drawing to a close amid a tentative U.S. recovery, high unemployment and persistent concerns over sovereign debt in Europe,” John Puchalla, Moody’s vice president and senior credit officer, says in a statement.

The rating agency says that the increase in the stress index could be a warning that speculative-grade corporate liquidity remains dependent on continued access to credit markets, and billions of dollars of high yield debt maturing over the next several years could put pressure on default rates if the economy remains volatile and credit markets are unwelcoming.

Moody’s says that U.S. speculative-rated companies have about $800 billion in loans and bonds maturing between now and 2014.

Overall, there were four downgrades to SGL-4 in June and another five through mid-July, Moody’s says.

However, although the index is rising, it remains below its 8.4% historical average since Moody’s first assigned SGL ratings in 2002, Puchalla notes.

The last time the index started to move up markedly was in June 2007, just before the credit crisis, and it peaked at 21% in March 2009.

Moody’s proprietary index takes the total number of companies rated SGL-4, the lowest liquidity rating on a scale of 1 to 4, and divides it by the number of companies that have SGL ratings. Thus, the more SGL-4-rated companies there are each month, the higher the liquidity-stress index.

The report, “U.S. Speculative-Grade Liquidity Worsens for the First Time in 15 Months,” is available on Moody’s web site, www.moodys.com.

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Unintended Consequences of Reform Hinder ABS Issuance

The repeal of Section 436(G) of the Securities Act of 1933 —  what the Wall Street Journal in an article this morning called an “unintended consequence” of the Dodd-Frank Wall Street Reform and Consumer Protection Act —  is likely to open rating agencies to unprecedented liability for the quality of their ratings on ABS transactions, according to Barclays Capital analysts.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not.”

Barclays Capital

Asset-backed Securities

With difficulty assessing this new liability, Moody’s  Investors ServiceStandard & Poor’s and Fitch Ratings have already pulled back from the new – issue securitization market. Barclays analysts expect this to impact consumer ABS more than residential credit ABS, where issuance volumes have been generally lower and issuance that has come to the market has generally been privately placed as 144A deals .

In light of the support previously shown by Congress and the Obama Administration for consumer ABS, Barclays analysts doubt that the intent was to hinder securitization.

They believe that the repeal is an unintended consequence of the larger legislation and will be solved in a “mutually beneficial way” by the industry and the Securities and Exchange Commission (SEC).

According to Barclays, Rule 436(G) currently provides a carve-out for rating agencies from the consent requirements with respect to the provision and use of expert information in offering materials.

This protects rating agencies from liability for their ratings, which are considered opinions rather than expert advice.

To close an ABS  transaction, it  must have a rating from one or more nationally recognized statistical rating organizations (NRSROs).

When ratings are mandated, SEC regulations require the ratings to be disclosed and released by the agency in the public offering documents.

Analysts said that failure to disclose this information could be considered a material omission and would potentially subject the issuer and underwriter to further liability.

“Thus, disclosure of ratings in offering documents of publicly registered securitizations is required, but consent of the agencies to include them is not,” says Barclays analysts in the report released Wednesday.

As a result of the appeal, which will be effective one day after the legislation is signed into law by President Obama, rating agencies will need to consent to the use of their ratings in public offering materials.

If provided, this will likely open the agencies to liability under Section 11 of the 1933 Act under which they were previously not exposed.

Moody’s, Fitch, and S&P have each suggested that they are not likely to provide such consent at this time.  Their hesitation has put the brakes on new publicly registered ABS issuance, Barclays analysts says .

“While we will continue to publish credit ratings, given the potential legal consequences, we cannot consent to the inclusion of ratings in prospectuses and registration statements without further study. Issuers should discuss this change for the use of credit ratings in public offerings registered under the ’33 Act with their legal advisers,” Moody’s reported in a press release this week.

A statement by S&P highlighted some of the steps taken to provide transparency in light of the reform.

“We are currently examining the proposed legislation and expect to provide additional information to you in the future about any related new procedures or changes to our processes,” the agency states.

Fitch have issued a similar statement, indicating that the potential liabilities would prohibit them from providing consent.

“While Fitch will continue to publish credit ratings and research, given the potential consequences, Fitch cannot consent to including Fitch credit ratings in prospectuses and registration statements at this time,” the credit rating agency reports.

DBRS, too, comments on the rule’s repeal, adding: “In view of the unprecedented treatment of credit ratings resulting from the repeal of Rule 436(g), DBRS is not willing to consent to the inclusion of its ratings in registration statements or prospectuses at this time. Of course, DBRS will continue to make its credit ratings and research available to the public through its normal distribution channels.”

The intent of the repeal was to make rating agencies more accountable for the quality of their ratings.

It appears, however, that the issuance of public securitization is likely to “come to a halt” in the near term as a result of their hesitation, analysts says.

Consumer ABS has generated new- issue activity in the securitization market for the past 18 months.

Analysts do not believe that Congress was trying to reverse those gains. They view the repeal of Section 436(G) as a “temporary speedbump” that will likely cause a temporary decline in issuance volume.

Meanwhile, solutions include a move by issuers to the private/144A  market, where public filings with the SEC are not required, Barclays analysts says.

However, Bank of America Merrill Lynch analysts said in a report this week that limiting ABS issuers to the 144A market could reduce the options available to many investors.

With a substantial portion of consumer and commercial ABS issuance stemming from the public market, many investors can not participate in the 144A market and it would therefore not be a long-term solution, the analysts noted.

Additionally, a shift to the 144A market could also have the potential of increasing funding costs to issuers — which would eventually be passed on to consumers.

Some issuers may choose to reduce origination volumes if faced with rising funding costs, BofA analysts observes.

Alternatively, says Barclays analysts, the SEC could also collaborate with the industry to alleviate the unintended results of the repeal.

Analysts expect the former to take place initially, but the latter to be the eventual long-term result.

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