Moody's Investors Service is striking back against rating shoppers and is warning investors in collateralized debt obligations to watch out for deals in which bankers and collateral managers may be exploiting different standards. The issue is coming to the fore now because Moody's has been left off a handful of CDOs backed predominantly by sub-prime mortgage receivables in recent months. The agency wants to assure the market it has been excluded from recent sales not because it cannot rate these transactions, but because its ratings would raise funding costs for CDO managers.
"The fact that we don't have an opinion out there is an opinion in and of itself," said Noel Kirnon, group managing director for CDOs, referring to the roughly five recent ABS CDO transactions that have been sold without a Moody's rating. He declined to name the transactions, but noted the rating agency has been hearing whispers in the market it was unable to rate these transactions. He suggested bankers are choosing to leave Moody's out because it is more conservative when it assesses interest-rate stresses to the underlying sub-prime collateral that, given the sector's dominance, has to play a significant role in any multi-sector CDO.
Market participants said one deal in question is the tenth RMBS-backed CDO from C-BASS, which did not use a Moody's rating on the deal even though Moody's had rated the previous nine transactions. Landon Parsons, head of the ABS CDO program at C-BASS, could not comment by press time.
The notion of rating shopping is particularly relevant now since the three major rating agencies have all recently changed the interest-rate stresses they apply but at varying times, making it difficult to compare collateral from earlier in the year to the bonds being included in new CDOs. An official at one of the other two rating agencies agreed there is a fair amount of shopping going on. "Bankers don't care who rates the deal and as long as the investors are comfortable with it, they don't need a Moody's rating." He suggested, however, this is only really an option in areas where both Fitch Ratings and Standard & Poor's have strong franchises, such as in sub-prime mortgages, and would not be an option for bankers pursuing deals backed by other types of collateral such as leveraged loans. John Schiavetta, head of the CDO group at Fitch, and David Tesher, his counterpart at S&P, did not immediately return calls by press time late last week.
In a report last week, Moody's showed hypothetical vehicles with varying amounts of non-Moody's rated collateral and shows how it would assign lower ratings to deals backed by this kind of collateral. "We have concerns about it. There's a lot of high loan-to-value and interest-only collateral" being included in bonds of sub-prime mortgages, said another Moody's official.
