In a recent announcement, it appears that Standard and Poor may downgrade approximately $578 billion in corporate debt securities. This comes after the group ran tests to evaluate its current ratings methods in light of how they would perform during severe economic declines.
The New York-based S&P went on to explain that the changes it is making to how securities are rated may lead to cuts in almost 4,790 tranches of collateralized debt obligations. Supplemental tests will be completed on existing model in order to simulate the conditions caused by increased defaults to calculate potential losses.
The S&P and Moody’s Investors Services are both being blasted with criticism from lawmakers such as Chris Dodd, the Chairman of the Senate Banking Committee, for how they’ve ranked structured securities like CDOs, since in many cases the top rankings were assigned to subprime mortgage bonds in the period before the 2007 market collapse.
Standard and Poor’s changed policies have already taken effect for new and existing transactions will affect CDOs that are made up of bonds and loans as well as those including credit-default swaps. They are derivatives connected with the debt. Those with AAA ranking would survive during serious economic distress.
S&P chose to monitor $319.6 billion of U.S. CDOs and $250.5 billion of European CDOs for possible downgrade due to its policy changes. A little over 3,000 tranches in the U.S. and just over 1,600 European ones comprise the majority of S&P’s ratings on those transactions that were not already being reviewed. The rating company said a total of 4,790 tranches worldwide could be put on review.
The decision to revise its ratings methods was initially proposed back in March when S&P requested comment from market participants. It remains to be seen whether this decision will be a good one or not.
Tags: Bond credit rating, corporate debt, Senate, debt, policy, March, Mortgage, Standard & Poor
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