Thursday, March 17, 2011

Looking for a Mis-Rated Subprime Bond?

As we combed through the latest list of subprime RMBS ratings downgrades, we found some astonishing actions, like AA ratings being reduced to CCC in one fell swoop. (Source: S&P's March 16 press release, entitled: S&P Lowers 172 Ratings On 39 '03-'04 US Subprime RMBS Deals, see for example Fremont Home Loan Trust 2004-3 Class M4.)

But one in particular caught our eye:

Welcome to Morgan Stanley ABS Capital I Inc. 2004-NC5 Class B4

Rated C by Moody's and CC by S&P (the lowest and second lowest ratings respectively), the bond paid off in full.

Click to enlarge

As the chart shows, this bond didn't suddenly pay off in full, catching the raters by surprise. Rather, it paid down ever so slowly, but consistently, especially over the period from February through November 2010. (The factor describes the percentage of the bond's par value outstanding at any time, as a percentage of its original face value. In this case, it went from 100%, or 1, down to approximately 20% in mid '07, and then down to 0%, ultimately, in November 2010.)

But wait, this gets better: while S&P simply denotes the CC rating as being withdrawn (as opposed to being paid off in full), as per their procedure, Moody's skips over the B4 class in its March 15, 2011 press release entitled: Moody's downgrades $2.75 billion of Subprime RMBS issued by Morgan Stanley in 2000 through 2004
We did a little checking. First we wanted to verify from the deal's trustee report that class B4 really did get all its payments. Turns out that not only did the B4 pay off in full (four months ago), but the C-rated B3 notes, still outstanding, are paying off handsomely too. Since Moody's downgraded the B3 notes (CUSIP 61746RGA3) to C in Feb. 2009, they've paid down more than 56% of their balance!

The bond continues to pay (as of Feb. distribution), and now has a factor of just under 11% remaining. It's currently rated C, CC and C by Moody's, S&P and Fitch, respectively.

Click to enlarge

Update: Feb. 2012: tranches B, C, D and E of Parkridge Lane Structured Finance Special Opportunities CDO I Ltd. were withdrawn after paying down in full. They paid down slowly over time. At the time of final payments, the B notes were rated Caa1 by Moody's and CCC+ by S&P. The E notes were rated Ca by Moody's and CCC- by S&P.

For similar funky findings, click here or here or here. For our coverage of weird (usually structured finance) model errors, click here.


raterJoe said...

love the way the M1s have been Aa2 on watch negative for almost a year. now slammed to Caa1. way to go surveillance

Anonymous said...

If only there were a clawback for surveillance fees! The investors essentially paid them for getting this as wrong as humanly possible

whatever said...

is this management's fault for not having enough bodies on the floor? or are the bodies asleep at the wheel? it's not like they're rating stuff right. the market is shut down? cant they redeploy the staff?

Uth Video said...

Investing is a gamble, Horse racing is a gamble. Walking across the street is a gamble. Marriage is a gamble. Life is a gamble. So what to do? Hedge and hope for the best.