Here We Go Again: S&P Slashes Thousands of RMBS Ratings

There’s a saying about death by a thousand paper cuts, and that’s clearly been taking place for most of the private mortgage-backed securities market over the course of the past twelve months. On Monday, Standard & Poor’s Ratings Services lowered the boom — again — on thousands of Alt-A and subprime RMBS, moving them all to a ‘D’ rating, as well as cutting hundreds of formerly AAA-rated securities multiple notches from their previous perch atop the ratings heap. The agency also began cutting ratings on prime deals, as well. The rating agency said it had lowered its ratings to ‘D’ on 1,078 classes of mortgage pass-through certificates from 650 U.S. Alt-A RMBS transactions from various issuers, while also placing 2,111 ratings from 143 of the affected transactions on CreditWatch with negative implications. Approximately 81.82 percent of the ratings on the 1,078 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, and approximately 98.98 percent of the ratings were lowered from a speculative-grade rating, S&P said in a statement. Outside of Alt-A, S&P also hammered its ratings on subprime securities, dropping 737 classes of mortgage pass-through certificates from 516 U.S. subprime issuances to a ‘D’ rating as well. Roughly 97 percent of the ratings on the 737 defaulted classes were lowered from the ‘CCC’ or ‘CC’ rating categories, S&P said. See the statement. That was just for starters, apparently. S&P also lowered its ratings to ‘D’ on 117 classes from 94 different prime jumbo deals, 89 classes from 68 U.S. closed-end second-lien deals, as well as 73 classes from from 48 U.S. scratch-and-dent deals. AAA pain mounts Despite all of the cuts to securities that were already considered speculative grade, it’s perhaps more telling that S&P also took the hatchet to AAA-rated classes — an example of a few Wells Fargo deals involving 32 classes is here, but there are others. These downgrades weren’t to a ‘D’ level, of course, but a fall from the AAA perch is likely to be comparatively far more painful for an investor. And for those really, really geeked out by this sort of stuff: some of the 2007 deals being downgraded here now have cumulative loss projections exceeding 20 percent. For the ENTIRE issue. That’s nearly unheard of outside of the subprime space. The bottom line here is this: for all of the pain felt in this area already, plenty of banks large and small are still generally carrying securities on their books at a level justifiable against current ratings levels, which is partly why trades in this space have been frozen. Buyers know the securities aren’t worth the AAA rating they’ve got, and frankly so too do any would-be sellers, but nobody can sell a security still at AAA at C-level prices and then justify the hit that so doing would have on the rest of their books. With many of these AAA high-fliers falling officially off their perch, expect two things to take place: one, further mark-downs to portfolio holdings among those institutions that hold a good amount of private-party Alt-A and other RMBS. Second, you might actually see some trades materialize as the number of AAA downgrades pick up and would-be sellers can no longer justify their ridiculous marks. There is a reason there is so much discussion — heated discussion — around a bad bank right now. Financial institutions are quite aware these downgrades are coming in waves, and are trying to figure out how to get out from underneath the second wave of soon-to-be bad debt as fast as they possibly can. Because there is still plenty of bad debt hiding on the books at most companies that were players in the private party mortgage market; and even before this round of downgrades, most of the TARP capital that has been doled out was done to offset the first round of write-downs. I tend to think Oppenheimer’s Meredith Whitney hit the nail on the head in suggesting last month that banks are going to need far more capital than what’s been committed to weather this mess. Write to Paul Jackson at [email protected].