Late last night, rating agency Standard & Poor’s did some quiet housekeeping.
In a late press release, S&P announced it was adjusting its cumulative loss measure on 2006 subprime collateral to 19 per cent – up from 14 per cent:
We revised our expected losses for the 2006 vintage subprime collateral to 19% from 14%, as delinquencies continue to rise, and we will recalculate lifetime loss expectations for all vintages of U.S. RMBS. Additional losses are projected to result directly for the additional delinquencies and defaults.
The press release is somewhat anodyne, but the implications of that tweak are disturbing:
It will mean huge new downgrades on CDO tranches from the 2005 vintage through to 2007.
We suspect this will push hundreds more CDOs through “events of default” and a significant number into liquidation – a likely repeat of the disastrous events in November and December, when CDOs went into meltdown and banks were forced to admit further humiliating writedowns. The last time S&P tweaked their loss-curves was at the end of October.
S&P are also altering their metrics; RMBS rating models will now apply the adjusted cumulative loss measure over the lifetime of the structures they rate – not just (as has hitherto been the case) over a 36-month period. That will likely make senior CDO investors more keen to liquidate deals: super senior swap holders, or AAA note holders in many CDOs have thus far been keen to accelerate but not liquidate the transactions on the basis that things will inevitably improve. The new model suggests they wont: controlling note holders now have every incentive to exit fast.
The crisis won’t just be restricted to CDOs – or subprime. Any structure containing RMBS will suffer; SIVs, ABCP conduits, even plain old securitisations.
And it might be the final nail in the coffin for the monolines – MBIA and Ambac. Both have maintained their crucial AAA issuer ratings by the skin of their teeth, having raised $2bn each in emergency capital to act as collateral. S&P’s metric readjustment means that the monoline stress-test they performed is now outmoded and over-optimistic. More defaults mean more insurance calls.
What remains to be seen now is when those calculations will feed through into a cataract of rating actions.