09/25/2009

FDIC Uncertainty Sends S&P to Sidelines

S&P is temporarily curtailing the volume of new ratings it assigns to asset-backed bonds issued by banks.

The retreat appears focused on credit-card securities, given their prevalence among bank-issued transactions. However, the agency still plans to grade a few such deals in the near term.

At issue is a longstanding lack of clarity about how bank insolvencies might play out after Jan. 1, when banks must start booking securitized assets on their balance sheets under the Financial Accounting Standards Board's pending FAS 167 rules. S&P apparently feels that before it gets back to business as usual, it needs to know more about how the FDIC plans to treat bond collateral tied in those scenarios.

The agency, like many other players in the securitization industry, is concerned that the FDIC could seize securitized assets to re-pay other creditors of failed banks.

Such actions are currently blocked by true-sale accounting procedures, in which issuers gain bankruptcy-remote status for their assets by transferring them to special purpose vehicles used in securitizations. But that treatment will vanish for banks with the implementation of FAS 167.

While the concern certainly isn't limited to S&P, it is the only rating agency that has taken action. An executive at another agency said he believes the FDIC will clarify its intent well before FAS 167 kicks in, and thus doesn't see the need for a similar move. "I would be surprised if [the FDIC] didn't put something out," he said. "They've always been pretty supportive of . . . securitization markets in general."

The American Securitization Forum is working on the issue. Officials from the trade group have met with FDIC representatives to discuss their concerns, and proposed two potential fixes in a Sept. 17 letter. One entails a "sale approach" that would require an FDIC agreement not to "reclaim, recover or recharacterize" securitized assets in a bank insolvency. The other, deemed a "security interest approach," would allow seizure of securitized assets, but only if bondholders receive compensation equivalent to the principal and interest they are owed. It's unclear whether the FDIC will adopt either suggestion.

Meanwhile, S&P's pullback has already started. The agency - historically the market leader in rating bonds backed by consumer assets - graded only eight of the 21 new credit-card deals that banks have distributed since the beginning of August. By comparison, it rated all 13 deals fitting that description in June and July, according to Asset-Backed Alert's ABS Database.

The agency's official take: "S&P continues to rate credit card ABS transactions in accordance with its published criteria . . . Although the recent accounting rule change has resulted in significant uncertainty about the treatment of these assets in the event of the bank's insolvency, some issuers have been able to mitigate the risk. We have rated credit card ABS transactions in the past few months that are structured as true sales."

S&P also noted that it rated some J.P. Morgan deals by tying them to the bank's unsecured grade. It is still supplying ratings for deals from non-bank institutions as well.

However, S&P's maneuvering means ratings from Moody's and Fitch are now more appealing options for many issuers. Those that want their deals to qualify for buyer financing via the Term Asset-Backed Securities Loan Facility might need to deal with both agencies, as the Federal Reserve requires that consumer-asset securitizations eligible for TALF financing carry triple-A grades from two of the three.

While the narrower field of options could delay some deals, it isn't expected to cause a major hiccup given the fact that many issuers have already been obtaining ratings from all three agencies for TALF transactions. That said, many banks, including Bank of America, Capital One and J.P. Morgan, were already thinking about scaling back their securitization volumes next year due to pressures created by FAS 167.

In any event, the thought is that securitizations completed this year will remain exempt from FDIC action even after the FASB rules take effect. That has left some people puzzled over why S&P is acting now. "We're still of the belief that you're still protected by the grandfather clause," the rival rating-agency executive said. "We're not sure what [S&P is] thinking."

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