A change to Dominion Bond Rating Services' methodology for rating leveraged super senior tranches of asset backed securities has bolstered spreads on the tranche. In a note circulated in early November, the agency said its approval of leveraged super senior notes referencing will be more restrictive. Immediately after the note was sent out, spreads on the tranche widened an average of 0.25 basis points--a significant move for the high-grade tranche--in anticipation of lower future demand. The agency has pulling power in this area because it rates Canadian conduits, which have been big buyers of 10-year protection in leveraged super-senior CDOs over the past year.
Speaking at Opal Financial Group's CDO Summit earlier this month, Jamie Feehely, senior v.p. at DBRS in Toronto, acknowledged the stir the change had caused, but said the agency takes rating stability seriously. That is why it has moved to a more conservative viewpoint on the structures that allows less leverage.
Over the summer, a number of banks held off on entering LSS deals while DBRS reviewed liquidity facilities. The review caught the attention of dealers across the globe as many significant Canadian investors require ratings from the agency (DW, 8/4).
