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March 16, 2012 12:04 am
Moody’s has taken a public shot at its rivals, warning that some of their credit ratings do not reflect rising risks in the securitisation markets.
Credit rating agencies have been vilified for failing to properly assess the risks associated with subprime and other lower quality mortgage debt ahead of the financial crisis. They gave triple A ratings to billions of dollars of mortgage securitisations that turned out to be far riskier and banks and investors suffered large losses.
Since the Dodd-Frank legislation of 2010, Congress has encouraged rating agencies to provide unsolicited credit ratings and supported an environment where agencies disagree on these assessments.
Moody’s Investors Service said that while the overall risk in the securitisation market remained low, it was inching up as lending conditions eased after a period of tight credit.
“In a post credit crunch environment, it is totally normal for there to begin to be a loosening of credit,” said Claire Robinson, a managing director at Moody’s. “It is important that protections for investors keep pace with that. In a lot of cases, it has and in some cases, it has not.”
The rating agency singled out a recent deal from Exeter Finance, a speciality auto finance company.
“Based on our review of publicly available information, we would not have assigned a high investment grade rating to the subprime auto [asset-backed securities] transaction recently issued by Exeter Finance Corp, which received high investment-grade ratings from two other rating agencies,” Moody’s said.
“Exeter is small and unrated, with limited experience and little asset performance history. The resulting potential for volatility in asset performance makes high investment-grade ratings inappropriate.”
Moody’s did not rate the deal. Standard & Poor’s rated the senior tranche, or the last slice to suffer losses if there are defaults, at double A. DBRS, a Canadian-based rating agency, gave it a triple A rating.
Moody’s also criticised triple A ratings on senior classes of credit-card bonds sponsored by companies such as Cabela’s, a retailer of outdoor merchandise, and World Financial Network.
S&P, Fitch and DBRS all rated the senior classes of the Cabela’s deal triple A.
S&P said the market benefited from “a diversity of opinions on credit risk”, while Fitch said Cabela’s transactions were “among the strongest performers of all the retail credit card ABS deals it rates”.
DBRS was unavailable to comment. Exeter declined to comment and officials for Cabela’s and World Financial Network were not immediately available.
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