Investors who buy the low risk traunches (and sometimes these are held
by the investor who either can't sell because of the risk or maintains
because of the high rate of return) MAY be in for disappointment, but I
seriously doubt that there will be a "savage downturn" in the AAA
market.
****
Perhaps it all depends on how you define AAA...
Uproar forces Moody's into U-turn over banks' ratings
By Richard Beales
Financial Times: Apr 02, 2007
Moody's, the credit rating agency, has backed down on a new approach to
rating banks after it triggered uproar among investors when introduced
in February.
The U-turn will see "40 or 50" mostly European banks placed on review
for a rating downgrade tomorrow just weeks after it upgraded dozens of
banks.
The move follows protests after the new rating approach, which takes
account of the likelihood of banks being bailed out by governments, led
to banks in countries such as Iceland receiving an unexpected triple-A
rating.
The scale of the ratings upgrades triggered sharp moves in financial
markets and led to questions from analysts and investors over the
validity of the new system.
Research group CreditSights, for example, discussed the changes in a
note entitled "Moody's Makes Aaas of Itself" - referring to the upgrade
of 16 European banks to the agency's top triple-A rating.
Icelandic banks Glitnir, Kaupthing and Landsbanki were among the biggest
surprises, each collecting upgrades of four or five notches to Aaa. Most
analysts at investment banks had expected the ratings to improve by just
one or two notches.
The Icelandic banks are likely to be among those now set to be
downgraded under Moody's "refined" methodology.
However, Christopher Mahoney, chairman of the agency's credit policy
committee, suggested that the earlier upgrades would not be completely
reversed.
"We anticipate that the required adjustments will be modest: themajority
being one notch, withthe remainder being two notches," he said. "In a
few instances, there may be three-notch changes."
Mr Mahoney told the Financial Times that the new approach had been
intended to take account of a long-running "theological discussion" in
the rating industry about how to factor into ratings the possibility
that some banks were unlikely ever to be allowed to fail even if they
appeared financially weak.
But he conceded that the results of Moody's revamp had left ratings
"relatively undifferentiated at the top" of the rating scale. Restoring
some of that differentiation by placing greater emphasis on banks'
intrinsic creditworthiness is the main goal of the revised methodology.
Moody's will hold conference calls on the latest changes to its
methodology today.
****
Top rating proving crucial to structured finance sector
By Saskia Scholtes and Richard Beales in New York
Financial Times: May 17 2007
Booming structured finance markets are pumping out huge volumes of
triple-A rated debt securities even as companies find increasingly that
maintaining the top credit rating is financially inefficient.
Structured products now account for around 99 per cent of the triple-A
credit market, suggesting investors are eager for the higher yields such
products can offer relative to triple-A corporate debt.
The dominance of structured finance also marks the dramatic ascendance
of a market that is heavily reliant on the rating agencies' stamp of
approval.
Jack Malvey, chief global fixed income strategist at Lehman Brothers,
said such securities are attractive for risk-averse investors because
"asset managers can represent that they have not only added yield but
also maintained an overall high quality portfolio".
This is increasingly difficult to achieve with more traditional forms of
debt, he added.
The number of US non-financial companies rated triple-A by Moody's has
declined to just five as developments in financing technology and
capital markets have made a higher degree of leverage - and therefore
lower ratings - more cost-effective for many companies.
This select group has a little less than $20bn of debt.
Meanwhile, the number of different US structured finance issues with the
top rating has mushroomed to more than 37,000, worth almost $5,000bn in
total.
The exponential growth of this market stems from the growth of
structured finance instruments that package portfolios of corporate
bonds, loans or consumer debts such as residential mortgages into new
securities for sale to investors around the globe.
The underlying portfolios often contain debt securities with low ratings
but, using complex structuring techniques, investment banks construct
new securities, some of which can win higher ratings by virtue of
priority access to the underlying cash flows. Buyers for these
securities include US and European pension funds and insurance companies
as well as Asian central banks.
However, Josh Rosner, consultant at investment research firm Graham
Fisher, expressed concern that the role of the rating agencies has
become a "necessary function" of the sale and distribution of such
securities.
He said this was particularly worrying in light of growing market
complexity that precludes many investors from doing their own full
analysis.
"What is clear is that the lack of liquidity, transparency, history and
available data coupled with increasing complexity has made it difficult
for all but the most well funded, well staffed and most sophisticated to
analyse the markets or assets," said Mr Rosner.