On April 15, 2020 Moody’s placed 404 classes (bond) of legacy US RMBS on review for downgrade, and downgraded and placed on review for further downgrade 48 classes for a total of 441 classes impacted. The 48 downgrades ranged from 1 to 4 notches. All the classes downgraded are now rated Baa3, the lowest investment grade rating. Below is a table summarizing the downgrade activity by bond type and collateral type and the number of notches downgrade. 92% of the bonds downgraded were subordinate bonds. 69% of this population were subprime bonds, of which 31% were downgraded 4 notches.
According to Moody’s, the rating rationale is the heightened risk of interest loss due to the slowing US economic activity and increased levels of unemployment. Moody’s states that they “considered the sensitivity of the bonds’ rating to the magnitude of projected interest shortfalls under a baseline and stressed scenarios”. Later in the press release they state that “Moody’s did not use any models, or loss or cash flow analysis, in its analysis” and “Moody’s did not use any stress scenario simulations in its analysis”.
Below is a breakdown of the classes impacted by these rating actions:
Collateral Composition
| Collateral Type | Class Count | % |
|---|---|---|
| ALT A | 42 | 10% |
| High LTV | 5 | 1% |
| Prime | 1 | 0% |
| Reperforming | 1 | 0% |
| Scratch & Dent | 14 | 3% |
| Subprime | 377 | 86% |
Downgrade Breakdown
| Downgrade Summary | ||||
|---|---|---|---|---|
| # of Notches Downgrade | ||||
| Bond Type | 1 | 2 | 4 | Total |
| Sub | 12 | 14 | 18 | 44 |
# of Notches Downgrade | ||||
| Collateral Type | 1 | 2 | 4 | Total |
| Subprime | 4 | 4 | ||
| ALT A | 3 | 1 | 1 | 5 |
| High LTV | 1 | 1 | 2 | |
| Prime | 1 | 1 | ||
| Reperforming | 1 | 1 | ||
| Scratch & Dent | 1 | 1 | 2 | |
| Subprime | 7 | 11 | 15 | 33 |
| Total | 12 | 14 | 22 | 48 |
Vintage Breakdown
| Vintage | Class Count | % |
|---|---|---|
| 1999 | 1 | 0% |
| 2000 | 2 | 0% |
| 2001 | 4 | 1% |
| 2002 | 17 | 4% |
| 2003 | 25 | 6% |
| 2004 | 139 | 32% |
| 2005 | 167 | 38% |
| 2006 | 63 | 14% |
| 2007 | 22 | 5% |
Capital Position Breakdown
| Capital Position | Class Count | % |
|---|---|---|
| Senior | 26 | 6% |
| Sub | 414 | 94% |
Additional Rating Action Information
- Of classes put on watch, 18 are currently incurring write-downs.
- Of the classes downgraded, none are currently incurring write-downs.
- Of the classes put on watch, 91 are currently experiencing outstanding interest shortfalls.
- Of the classes downgraded, only one currently has outstanding interest shortfalls.
- The average 60+ / FC/REO/BK is 12.68%.
- The average credit enhancement is 53%.
- The average collateral pool factor is 6.51%.
- The average class factor is 44.88%.
- Sixteen of the classes on the downgrade list have incurred 100% writedowns and had their ratings previously withdrawn.
- Two of the classes on the downgrade list have paid in full years ago.
- The average delinquency advance rate is 64%.
- The average % modified is 42%.
- The average Net WAC (collateral) is 4.66%, the average bond coupon is 2.03%, resulting in an average net WAC minus bond coupon is 2.63%.
According to Bloomberg, there have been 2,100 US structured finance bonds with rating activity over the last 30 days. The greatest rating activity was experienced in the following sectors: Freddie/FNMA CRT transactions – 307 bonds on negative watch, the CMBS sector has 121 bonds on watch and 42 have been downgraded, CLO sector has 105 on watch and the Auto sector has 157 on watch and 7 have been downgraded.
Stay tuned for future updates on the impact of COVID-19 on the structured finance sector.