Standard & Poor's has issued new bond insurance rating criteria, a much-anticipated move that could define whether muni bond insurers will ever regain their triple-A ratings.
The criteria considers a common set of 11 analytic categories, including industry risk, competitive position, management and corporate strategy, operating performance, capital adequacy, investments, largest obligors, financial flexibility, enterprise risk management, liquidity, and leverage.
David Veno, an analyst at Standard & Poor's, said there are three major changes in the criteria that differ from the request for comment criteria published in January: leverage, capital charges changes, and the largest obligor test.
The leverage test will now only act as a filter for companies with a AAA rating, and cannot exceed 75:1 for all risk categories.
"There is only a leverage test for AAA-rated companies because higher leverage would not be consistent with AAA credit stability," Veno said. He added that the leverage test only exists for companies rated triple-A because there is a possibility that stress associated with model error or event risk may not be captured in the triple-A stress scenario used in the criteria.
The second biggest change in the criteria is a capital charge. Capital charge is higher than the rating agency historically put in place, but in some instances are not as high as they were in the request for comment criteria issued in January.
"We used the stochastic model whereas the request for comment criteria was tied to the Hempel study," Veno said, adding that the recoveries in the current model will be higher than the Hempel study. "We're giving bond insurers credit for control rights, loss-mitigation efforts, and underwriting and active surveillance."
The third biggest change in the criteria is the largest obligor test. Veno said the single-risk test has been adjusted to reflect and be more consistent with the largest obligor test within S&P’s CDO Evaluator. "We group exposures to obligors based on ratings, and judge how bond insurers have the capital resources to withstand a default," he said. "It also captures concentration risk in the portfolio. So it will limit the growth exposure to any groups of insurers."
The agency declined to comment on specific rating changes for bond insurers and said any changes will take place in November.
A conference call regarding the rating criteria will be held Monday morning.
