Bond markets have experienced an issuance bonanza this year, with both the size and frequency of deals in the ascendancy. Triple A activity has traditionally been frenetic in the first quarter of the year, with much of the issuance from the major agencies coming near the start of the year. There has, therefore, been a lot of Triple A paper knocking about in the first months of 2009.
But in certain fundamental respects, the Triple A sector in 2009 has started to look very different from previous years. In the SSA market there has been a move away from diversifying issuance into a range of smaller currencies and a focus on core currencies, with the euro, in particular, coming to prominence.
Simultaneously, there has been evidence of an increasing appetite for shorter dated paper, in response to a general feeling of uncertainty about the future which has affected issuers and investors alike. This has been a real challenge for some issuers, who have found themselves unable to distinguish themselves from sovereigns and top quality corporates by concentrating on a different point of the curve.
The general focus on the short end has seen a greater level of scrutiny even within the Triple A universe, and those found to be of relatively inferior quality have found themselves to some extent squeezed out.
SSAs, in particular, have had to contend with the much discussed emergence of government guaranteed paper – no small encroachment on their traditional investor territory – adding to the general feeling of claustrophobia.
At the other end of the Triple A spectrum is the ever-newsworthy world of structured finance, the corner of the financial markets that divides opinion more than any other. As far as ratings are concerned, the key debates have been whether securitisations should even be dignified with the prestige of a Triple A rating. In the blue corner are those that feel they sully the good name of those corporates, sovereigns and others that “deserve” the title; in the red, those (among them many investors) who counter that taking away this title would effectively shut them out of such investments.
Many possible solutions have been floated, including a new rating scale for securitisations, a more rigorous rating criteria for securitisations or additional suffixes for structured finance ratings to denote rating volatility and sensitivity to changes in model assumptions. The debate rages on, but it seems a tightening of the criteria by which structured finance transactions are rated is the only likely change.
This is in part due to an emerging recognition that the negative sentiment surrounding securitisations may have exaggerated quite significantly how hopeless the prospects for these instruments were. The expected number of downgrades and defaults have not materialised and Triple A structured finance instruments have in some cases actually held up comparatively well. The picture is muddied by the discrepancies in the behaviour of different types of transaction: UK prime RMBS have retained their ratings very well compared to US ABS CDOs, which have seen downgrades and defaults aplenty.
One thing is clear: if the goal is to create a gold standard, so that the credit rating of all securities rated Triple A are comparable, implying an equal probability of default, then there is a long way still to go.