Tuesday, April 22, 2008

Are AAA-rated bonds the next shoe to drop?

The second half of last year has seen substantial downgrades in RMBS paper. Most of the downgrades were centered around the junior mezzanine and equity positions. A recent report from HousingWire argues that downgrades on the most senior tranches of subprime RMBS mortgage paper have to follow soon. Deutsche Bank estimates that $650 billion on subprime mortgage bonds are yet outstanding, and that 75 percent — or nearly $490 billion — were rated AAA at issuance.

Based on the ratio of credit support to collateral at risk only 6 out of 80 AAA-rated bonds in ABX indexes passed the test for investment grade. The interactive chart below shows in detail which bonds failed and which passed.

click for interactive chart

Moody's investor service is on the case and according to HousingWire has slashed ratings on 1,923 tranches from 232 separate subprime RMBS deals from 2005-2007 vintages, including hundreds of former Aaa-rated securities. The new downgrades portend further earnings pain for the holders of the securities.

The entire list of downgrades issued since Monday morning and through early Tuesday afternoon, along with links to information on each issuer and affected tranche can be seen here.

source: Shell Game: Are Rating Agencies Holding Off on AAA RMBS Downgrades?

source: Stick a Fork in It: Moody’s Downgrades 1,923 Subprime RMBS Classes — In Just Two Days

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