Reworked ABS hit after S&P pulls plug

Fri May 9, 2014 11:31am EDT

* S&P comes under fire after withdrawing Bayview bond rating

* Move seen as setback for reperforming RMBS deals

* Banks sitting on US$26.4bn of rehabilitated subprime loans

By Joy Wiltermuth

NEW YORK, May 9 (IFR) - Standard & Poor's reputation in complex structured finance deals rolled out since the onset of the financial crisis is being questioned again after it pulled its rating at the last minute from a second asset-backed deal.

The most recent episode involved a so-called "scratch-and-dent" bond of reworked subprime residential loans, but the agency offered little explanation to justify its actions.

That left investors, other rating agencies and potential issuers calling for more transparency from S&P so the sector can move forward.

In the first week of May, a US$184.9m deal named Bayview Opportunity Master Fund IIIa Trust 2014-9RPL was halted midstream because S&P pulled its rating. The move came four days after S&P issued a presale report, and with co-leads Wells Fargo (structuring) and Citigroup already knee-deep in selling the deal.

The banks had offloaded most of the bonds, with only parts of the Triple As left to sell, two investors told IFR. But that was when S&P pulled the plug, saying only that it asked Bayview for additional information on property valuations and loss expectations, but that it had not receive it.

"This is a pretty big blunder," a ratings analyst at another agency said. He pointed out that the problems were unlikely to have cropped up overnight, as S&P would have been working on the transaction for a number of months. He also said it was customary for a committee to agree on a deal's ratings assumptions well before a 14-page presale is issued.

"It reflects poorly on all of us," the analyst said.

BANKS WANT TO OFFLOAD

The incident is being closely watched by other firms looking to lift similarly restructured loans off their balance sheet and securitize them. Banks in the US are sitting on a US$26.4bn pile of rehabilitated subprime collateral, according to data from FBR & Co.

Bankers have since extended the closing of the Bayview deal beyond its initial May 12 target. But further issuance in the sector is expected to be held up until Bayview's problems are resolved, the analyst said.

S&P, Bayview and the co-lead banks declined to comment on the matter once the ratings were pulled.

S&P's other blunder dates back to the summer of 2011 when it revoked its ratings on a US$1.5bn CMBS from Goldman Sachs and Citigroup. The banks scrapped the deal five days after pricing, reviving it two months later.

The fallout shut S&P out of the lucrative conduit CMBS deals for 14 months. After the rating was pulled on the CMBS deal, issuers retaliated by seeking ratings from other agencies. That time, at least, S&P provided reasons: an internal review found it had been using more than one "potentially conflicting" model for its CMBS ratings process.

It is unclear if the latest episode will cost S&P business on future rehabilitated subprime residential loan deals.

WHAT WENT WRONG

Insiders say that the issue with the Bayview deal revolved around the fact that S&P's presale report put little confidence in broker price opinions, the industry's most common metric for distressed loans. The main criticism of BPOs is their subjective nature as they are essentially what a broker thinks of a home's value.

In this case, S&P thought the homes were worth more than the BPOs given by Bayview. S&P's decision to assign an average loan-to-value ratio of 90.1% to Bayview's loan pool was the first sign of trouble, an investor said. Bayview's own calculation was much higher at 147.57% - a rare flip in roles with a ratings agency coming out with far less conservative assumptions than the party looking to issue a deal.

Fitch commented a day after S&P pulled its rating, saying it expected Bayview's pool to see a roughly 20% increase in defaults and a 30% jump in losses versus S&P's calculations. However, S&P's request for more valuation and loss data may imply it wants to double-check its numbers.

Still, some involved were convinced that halting the deal may have been the best option.

"When a ratings agency has concerns [about if] they are doing the right thing, it's interesting when the market gets upset about that," a second ratings analyst said. "The alternative is you ratings agencies go off half-cocked and put Triple As on something they don't know." (Reporting by Joy Wiltermuth; Editing by Matthew Davies and Anil Mayre)

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