Credit Suisse’s Mortgage-Bond Deal Shows Rating Firm SplitsJody Shenn
Credit Suisse Group AG issued securities tied to $425.7 million of new jumbo U.S. home loans without government backing, in a transaction showing how rating firms’ views are diverging as the market revives and the deals offer more protections for lenders and investment banks.
Standard & Poor’s, Fitch Ratings and DBRS Ltd. all assigned top grades to the senior, $392.4 million slice of the deal, they said in statements today and yesterday. S&P gave lower ratings than Fitch to other classes, while DBRS didn’t offer any additional grades.
DBRS saw the loss buffers of the junior-ranked debt as insufficient “to assign the same ratings on those bonds as the other rating agencies,” Quincy Tang, an analyst in New York, said in an e-mail.
Ratings companies, after fueling the U.S. mortgage-credit bubble that caused a global financial crisis, are now confronting a market with accelerating issuance and lenders and bond sponsors such as Credit Suisse and JPMorgan Chase & Co. that are seeking safer contracts for themselves. The split grades on some of the Credit Suisse bonds signal rating firms may also be varying their approaches to the relative risk implied by the different grades, further reducing their comparability.
Drew Benson, a spokesman in New York for Credit Suisse, declined to comment on the deal.
So-called non-agency mortgage bond offerings completed so far this year have packaged about $1.5 billion of new loans, compared with $3.5 billion in all of last year and a total of less than $1 billion in 2010 and 2011, according to data compiled by Bloomberg.
The top-rated bonds in the Credit Suisse deal carry a loss buffer of 7.05 percent. The so-called credit enhancement, created by other classes of securities that are first in line for losses, was increased from 6.75 percent when the debt was first marketed earlier last month, potentially reducing Credit Suisse’s profits on the transaction.
DBRS said today in a report that the transaction’s risks included the weak financial strength of some of the lenders that made the loans, originators that would be required to buy them back if the debt’s quality proves to have been misrepresented.
The deal was also weakened by the nature of promises by Credit Suisse to repurchase the debt if those originators fail, as well as the fact that there was a “relatively large portion of self-employed borrowers” at 24.5 percent, DBRS said.
Still, the mortgages generally have “high-quality credit attributes,” such as big down payments, DBRS said.
Fitch released a report on Feb. 20 saying it was concerned with changes to mortgage-securitization contracts being sought by issuers looking to protect themselves against forced repurchases of misrepresented debt. For the Credit Suisse deal, Fitch said yesterday it accounted for “weaker” representations and warranties as part of its analysis, without explaining how.
Fitch assigned a grade of AA, its third highest, to an $8.7 million class of the securitization with the second-highest seniority. S&P said yesterday in a statement that it assigned that debt a rating of A, its sixth highest. S&P granted lower or no rankings to an additional $11.3 million of debt that Fitch offered investment grades.
S&P cited the deal’s representation and warranties as a weakness, along with a geographic concentration of loans in certain California areas. It also said the mortgages were high quality.
While the deal contained some “notable” improvement to its repurchase covenants over a November deal by Credit Suisse, Fitch said it also allows the bank’s backstop on lenders’ promises to buy back faulty loans to lapse after 36 months and be “conditional” in some ways.
The transaction also doesn’t have an “automatic breach review trigger,” Fitch said. Deals by Redwood Trust Inc., the only other issuer in the market since it revived in 2010, have required reviews of any loans that go more than 120 days delinquent, though in certain cases only Redwood can then demand repurchases by lenders, according to its offering documents.
In the Credit Suisse deal, “senior and subordinate investors can direct the trustee to initiate loan reviews and enforce put-back rights,” Fitch said.
Moody’s Investors Service said in a Feb. 25 report that it won’t assign its top ratings to bonds with “significant” limits on when and how mortgage repurchases can be forced.
Credit Suisse planned to team with Two Harbors Investment Corp. on the securitization, people familiar with the matter said this month, asking to not be named because the transaction is private. The real-estate investment trust was set to buy junior-ranked debt and provide some of the underlying loans.