Tuesday, February 19, 2008

DBRS Downgrades ABCP Trusts and Changes Rating Methodology

By: John Sokic, Clarity Financial Strategy

On February 15th, DBRS announced a downgrade of Planet, Ironstone, Aurora, Aria an Apsley trusts, mainly due to their subprime exposure within CDO transactions. (www.dbrs.com). All of these trusts are covered by the standstill agreement and restructuring efforts of the Crawford committee.

Also on the 15th, DBRS said it has changed its methodology for rating CDOs that reside within Canadian conduits. Specifically, they are looking to reduce their reliance on US-based rating agencies. Normally, DBRS would simply use ratings by US agencies on the underlying RMBS within CDOs, then plug them into a model to come up with AAA-level enhancement for the CDO.

Now, instead of coming up with ratings of their own, DBRS has decided to notch US ratings when they are on negative watch. The notching is fairly punitive, which DBRS calls conservative. In relation to Crawford's restructure, the assets in question all fall into the 'ineligible asset' group, also known as the subprime bucket. I have to say I am not sure where DBRS is adding value here. When I first read the headline relating to a change in their methodology, I assumed they would actually 'fess up’ and begin rating the underlying RMBS themselves. Instead, they are offering a prediction of where the other agencies will place their ratings in the future - only in Canada.

These actions make the outlook fairly bleak for that 3rd bucket of assets. The downgrades for Ironstone and Apsley are so low that they are below investment grade (R-4 or BB (high)). The others are not as bad but it would appear to mean that the notes emerging from the tranche will not have investment grade ratings and that they will have an even more difficult time trading in a secondary market.

No comments: