Standard & Poor’s has suspended its ratings on deals insured by ACA Financial Guaranty Corp. in each instance where the agency does not have publicly disclosed underlying rating on the deal.
“Standard & Poor’s has concluded that current ACA-enhanced issue ratings may not adequately reflect the underlying credit characteristics of these transactions,” the agency said Friday in a press release. The rater dropped its mark for ACA to CCC from A on Dec. 19 and is the only agency to maintain a rating for the insurer.
In most cases where an issuer buys ACA insurance, that issuer has not paid for an underlying rating from Standard & Poor’s. Until recently ACA’s rating was much higher than the borrowers it insured.
This situation means that most of the deals with ACA insurance carried only the insurer’s CCC mark — a level that might now be worse than the deals could get on their own. The action affected 2,103 public finance issues that no longer have ratings or outlooks from the agency.
But at least one market participant was critical of the rating action, saying that would just be a new charge to issuers who want to have a credit rating.
“What they really mean is that you have to pay another rating fee, in addition to the first fee that they collected when the bonds were originally sold,” said Dick Larkin, municipal analyst at JB Hanauer & Co.
Standard & Poor’s said issues whose ratings were suspended have “the option to enter a rating process” to get a new underlying rating.
He added that it might draw frustration from people outside the market.
“Given all the criticism of the rating agencies in the last few months, this certainly doesn’t make them look any better,” Larkin said.
At issue is whether Standard & Poor’s already has the information to rate issuers who do not have formal underlying ratings. The rating agencies typically analyze every credit that insurers wrap to decide how much capital the insurer needs to maintain its rating, which could mean Standard & Poor’s already has evaluated the deals that carried ratings based on ACA insurance and were suspended.
“What would happen if they downgraded [MBIA Insurance Corp.] or [Ambac Assurance Corp.] and the same thing happened?” Larkin asked. “There would be chaos in the market.”
Standard & Poor’s managing director Howard Mischel said the rater’s evaluation of credits for purposes of tracking ACA’s portfolio is “a separate matter” from an issuer asking for a public underlying.
“Our decision to suspend was made in conjunction with the senior management of ACA and the feedback of many market participants,” Mischel said. “We thought it was a reasonable approach to take because the insurer’s rating is lower in most cases than the underlying rating would be.”
He declined to comment on the prices Standard & Poor’s would charge issuers to obtain new underlying ratings, saying it was “a process that is between a rating agency and the issuer, not a process that is between us and the media.”