Ratings: Year of the downgrade
The record number of ratings downgrades in structured finance has fundamentally altered the market’s dynamic.
"There haven’t been many cases where downgrades haven’t been justified"
In 2007, the global structured finance market suffered more tumult than ever before. For the first time, structured finance issuance actually fell below the previous year’s level. Unsurprisingly, this decrease was driven by the US RMBS and CDO markets, which fell 45% and 17% respectively. For the ratings agencies, the number of downgrades on structured finance securities reached new highs. The 12-month downgrade rate (measured as the proportion of rated securities that are downgraded at any point over the past year) for securities rated by Moody’s in the global structured finance market was a record 7.4%, up from 1.2% the year before. That accounts for 8,725 ratings from 2,116 deals, with 98% of those downgrades coming from the home equity loans, RMBS and CDO markets. On a less holistic level, US structured finance CDOs, the source of much of the sub-prime grief, experienced a 12-month downgrade rate in excess of 20%, from just 3.2% last year. It is a similar story at the other rating agencies, with widespread downgrades on predominantly 2006 and 2007 vintage securities backed by sub-prime assets.