AAA ratings could become a rarity in Europe’s securitization market with the next few years, London-based analysts are warning.
The recent decision by Moody’s Investors Service to slap ratings caps on Spanish, Italian and Portuguese securitizations after downgrading six European sovereigns, coupled with its placing of 114 European banks and 10 global banks on review for downgrade, could create a ratings drag on securitizations in the region, according to a new study by the Royal Bank of Scotland.
RBS analysts said Tuesday that banks acting as counterparties across European securitizations—either as liquidity facility providers, cash account managers or swap providers—could find it increasingly tough to source suitable replacement counterparties in the event of a downgrade. Under tough new counterparty rules, issuers must install back-up counterparties in case the original counterparty is downgraded. Without this, the transaction as a whole faces a downgrade.
“The risk of domino effect on senior ABS ratings has slowly started to increase via counterparty trigger breaches in transactions,” Chimdi Momah, RBS analyst and author of the study, explained.
Momah said future Moody’s downgrades could ultimately leave 15 notable structured finance counterparties below A3 ratings. “While some counterparties may be able to find a replacement counterparty, we expect that with the declining number of eligible counterparties, this will be increasingly difficult.”
London-based market officials told SI in January that issuers and investors are already weighing up whether the region’s securitization market can maintain its AAA status, in part due to a shrinking pool of eligible counterparties (SI, 2/7).
“AAA ratings are extremely rare in other vanilla credit risk asset markets, such as industrials and financials, and becoming anything but a given in sovereign ratings,” Momah said in the study. He noted that AAA ratings in securitization are increasingly expensive to achieve, adding that a major pre-crisis motivation for achieving a AAA rating—to tap the bank SIV and conduit appetite—has gone.
“We can see no reason why a market for senior-most ABS ratings in the AA or even A categories will not be viable going forward as a contemporary alternative to AAA ratings of old,” Momah said, noting that pushing for AAA tag is proving almost prohibitively costly for some issuers. “The economic rationale to continue structuring and supporting AAA ratings is likely to gradually weaken given the heightened transaction cost.”