Whoops!
NEW YORK (Standard & Poor’s) Dec. 15, 2010–Standard & Poor’s Ratings Services today placed its ratings on 1,196 classes from 129 U.S. residential mortgage-backed securities resecuritized real estate mortgage investment conduit (RMBS re-REMIC) transactions issued in 2002-2010 on CreditWatch with negative implications.
The complete rating list is available …
The CreditWatch actions primarily reflect our revised analysis of timely interest according to our criteria, including consideration of the impact of pro rata allocation of interest among the senior and subordinate classes.
…
Previously, we incorrectly analyzed the timely interest payments, and did not incorporate an analysis of the effect of interest paid pro rata on the senior securities (that, all else being equal, inherently contain lower credit protection than those in which the interest is paid sequentially) for those transactions that have this structural feature.
Approximately two-thirds of the classes affected by this CreditWatch action are from transactions issued in 2010 and approximately one-quarter were issued in 2009. Of the remaining classes issued before 2009, credit deterioration was the primary factor in many of the actions. In general, these CreditWatch placements did not include classes that, in our opinion, have displayed sufficient credit enhancement to pay timely interest under the appropriate stress scenario to maintain the rating, or any class currently rated below ‘B- (sf)’ or that we expect to pay off in a relatively short period of time (i.e., the percentage of the original balance outstanding below 5%).
This is technical but stick with it.
Re-Remics stands for or Resecuritisation of Real Estate Mortgage Investment Conduits — or (basically) recooked RMBS. You take a bond (typically super-senior) from a downgraded deal, slice it into new tranches, et voila — you have conjured new AAA-worthy securities from what was once a festering pile of junk.
S&P is now the second-biggest rater of the deals — which have seen issuance of some $80bn over the past two years or so – after Fitch tightened up its re-Remic rating criteria earlier this year. (For what it’s worth, S&P is the only rating agency which actually requires that it also rates the bonds underlying the re-Remics.)
The issue here seems to be those interest payments and whether they’re made according to seniority (following the traditional structured finance waterfall) or ‘pro rata’ — i.e. equally to all classes. The latter, according to S&P, makes for some weaker tranches because it means there’s less left to pay the senior classes interest.
S&P is attributing that — erm — interest payment oversight “to an error.”
And the error will be a pain for the $30bn worth of bonds estimated by Braver Stern Securities to be affected by Standard & Poor’s omission. Not least because most re-Remics have been issued with only one rating — which means the majority of the 1,196 deals mentioned above probably won’t have another one to fall back on.
And remember these things are all about the ratings.
So no surprise that the market looks annoyed, to put it mildly.
Via Bloomberg:
“An admission of guilt by a rating agency: How refreshing, and also what a wonderful Christmas-time present,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” published in May by Oxford University Press. “What I want to know is, is anyone going to get fired over this?”
Ouch.
Related links:
Testing re-Remics – FT Alphaville
Rating re-Remics - FT Alphaville