Is one set of ratings enough for ABS?
When Tesla packaged its car leases into bonds for the first time in February, it took the unusual step of securing ratings from only one agency.
ABS issuers typically always sought ratings from at least two of the Big Three credit rating companies - Moody’s, S&P and Fitch - to try to cast the widest net for potential buyers.
But as investors have taken on more of the research functions they delegated to the agencies before the crisis, many borrowers now sell securitisations with just one set of ratings.
Tesla certainly had no trouble, getting final books close to US$4bn for a US$546m deal only rated by Moody’s, making it one of the most popular debuts since the crisis.
“We don’t rely on rating agencies to do our credit work,” said John Kerschner, head of US securitised products at Janus Henderson Investors and a buyer of the Tesla bonds.
“There is always risk with a new story, but we felt we were being compensated.”
He met with Tesla officials to conduct his own due diligence at an industry conference, and came away impressed enough to buy into the deal.
As JP Morgan analysts put it, the trade carried a “newness” concession and priced more like a risky subprime deal than a prime trade whose leases carried high 767 average credit scores.
“It’s different risk, but at similar spreads I’d rather be investing in Tesla paper,” Kerschner said.
The Big Three of course still dominate the overall business of rating bonds, but smaller firms have made “significant” inroads in asset-backed trades, the SEC said in its most recent annual report on credit ratings.
Smaller names such as DBRS, Kroll Bond Rating Agency and Morningstar had rated 12.5% of the asset-backed market as of December 2016, the report said.
This has been especially notable for lenders that have been using the ABS market to fund businesses from student loans to solar panels.
In a departure from the past, many such deals in the previous six months were vetted by the smaller agencies - and almost a third came with just one set of ratings.
Global Jet Capital came to market in October with its debut aircraft deal, a US$1.5bn offering that carried just Single A and Triple B investment-grade ratings from KBRA.
The buyside pushed back hard against the trade - both the type of collateral and the revolving master trust format were seen as riskier than on typical aircraft deals.
Fitch even took the unusual step of offering an unsolicited opinion, saying the deal did not meet its investment-grade criteria.
But when the deal was restructured in February, it was a smash hit with investors - and still only carried ratings from Kroll.
ONE AND DONE?
Only time will tell if ratings issued by insurgent companies hold up better than those issued by the Big Three in the run-up to the financial crisis.
But as smaller firms have gained prominence, more investors have amended their investment criteria to buy bonds carrying a broader range of ratings.
“The number of accounts who can buy other than the Big Three has grown to probably 90 or 100 versus a dozen or so when Kroll first started out [in 2010],” one ABS banker told IFR.
While investors now put less weight on ratings in their own risk-vetting process, though, not everyone views the trend of solo ABS ratings as a positive development.
“When you leave rating agencies out, it’s usually for a reason,” said Gil Libling, a senior portfolio manager at Semper Capital Management.
“The investment environment is such that more information is always better, not less.”