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