Bangkok--13 Oct--Standard & Poor's
Standard & Poor's Ratings Services is requesting comments on its proposed update to its criteria for rating collateralized debt obligations (CDOs) and pooled tender option bond (pooled TOB) transactions backed by U.S. municipal debt securities. Concurrent with the release of this request for comment (RFC), Standard & Poor's is publishing an advance notice of proposed criteria change on municipal pool programs that discusses a separate forthcoming RFC. That forthcoming RFC will detail the complete methodology for combining the elements detailed in this article with additional considerations which will be used to assign ratings to issues backed by public finance municipal pool programs (see "Advance Notice of Proposed Criteria Change: U.S. Municipal Pool Programs," published Oct. 12, 2011).
Our proposal and the specific requests we are making are outlined in the article "Request For Comment: CDOs And Pooled TOBs Backed By U.S. Municipal Debt; Methodology And Assumptions," published Oct. 12, 2011.
For rating CDOs of municipal debt and pooled TOBs, the proposed criteria would apply the same basic criteria that we currently use in rating CDOs of corporate debt, but with some differences driven by the characteristics of structured finance assets (for our current criteria for rating CDOs of corporate debt, see "Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs," published Sept. 17, 2009). Specifically, the differences are in:
- Modifying the municipal debt industry classification used in the default modeling simulation;
- Creating different municipal debt recovery groupings for the purpose of assigning expected recovery rate parameters after an asset has defaulted;
- Assigning different expected recovery rate parameters to each municipal debt grouping in the default simulation;
- Using different recovery timing lag parameters for realizing expected recoveries based on each municipal debt grouping;
- Reducing the expected recovery rate parameters for municipal debt referenced through synthetic securities and not basing post-default settlement on physical delivery;
- Modifying the supplemental stress tests (the largest obligor and largest industry default tests) to reflect the expected default behavior of the municipal debt; and
- Adjusting the correlation parameters used in the default simulation modeling between municipal assets and also between municipal and corporate assets.
- If adopted, the updated criteria would apply to all new CDOs of municipal debt and new and existing pooled TOBs. The proposed criteria will not affect ratings on municipal CDOs because there currently are no such ratings outstanding. For the few affected pooled TOB securities, it is likely that the application of these criteria will lead to downgrades of one to two rating categories.
RESPONSE DEADLINE
All interested market participants are encouraged to submit written comments on these proposed criteria. Please send your comments to
[email protected] by Nov. 12, 2011. You may also contact any of the individuals listed at the top of this article.
Once the comment period is over, we will evaluate the comments and finalize the criteria, which will consist of elements based on this RFC and from current criteria. We will then publish the updated criteria and provide details on the implementation plan, including how we will analyze all outstanding transactions using the updated criteria. We anticipate that it will take a few months to update all the outstanding ratings depending on the volume and complexity of the affected transactions.
RELATED CRITERIA AND RESEARCH
- Request For Comment: CDOs And Pooled TOBs Backed By U.S. Municipal Debt; Methodology And Assumptions, published Oct. 12, 2011.
- Advance Notice of Proposed Criteria Change: U.S. Municipal Pool Programs, published Oct. 12, 2011.
- Update To Global Methodologies And Assumptions For Corporate Cash Flow And Synthetic CDOs, published Sept. 17, 2009.
Related articles are available on the Global Credit Portal on RatingsDirect at www.globalcreditportal.com. Criteria can also be found on Standard & Poor's Web site at www.standardandpoors.com.
The report is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to
[email protected]. Ratings information can also be found on Standard & Poor's public Web site by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
Media Contacts:
Ola Fadahunsi, New York (1) 212-438-5095,
[email protected]
Edward Sweeney, New York (1) 212-438-6634,
[email protected]
Analyst Contacts:
Robert J Radziul, New York (1) 212-438-1051
James Breeding, Dallas (1) 214-871-1407
Henry C Albulescu, New York (1) 212-438-2382
James Wiemken, London +44-20-7176-7073