Archive for August, 2010

Rating Agency To Lose Fair Disclosure Exemption

August 19, 2010

No later than 90 days after the enactment of the Accountability and Transparency in Rating Agencies Act of 2010, the Securities and Exchange Commission will revise Regulation FD (17 C.F.R. 243.100) to remove the exemption for rating agencies.  REG FD ensures a fair and level playing field for analysts.; no longer will the rating agencies have access to material, non-public and confidential information.


Ratings Not In Compliance With SEC Regulation?

August 13, 2010

The Accountability and Transparency of Rating Act (SEC. 6001. Short Title) has a section entitled: Transparency of Credit Rating Methodologies and Information Reviewed.  Subsection (H) states: “information on the content of the credit rating including — (i) the expected default probability; and (ii) the loss given default.”  The regulation expands the definition of rating to include these two important factors.  Smith’s Gradings have always included default and loss given default PLUS event risk gradings.   However, the Rating Agencies have never included an expectation of loss and the Ratings are currently not in compliance with the SEC’s Rule?

Smith’s Tobacco Gradings

August 11, 2010

Smith’s Grading of the first tobacco settlement securitization deal , TSAC New York , was 55/3/-1 during November of 1999.  Moody’s rated the TSAC tobacco bonds “Aa3”, while S&P rated the bonds “A” and Fitch assigned a rating of “A+”.  Over the past decade, the rating agencies have downgraded the tobacco bonds until the credit assessments have reached levels consistent with Smith’s Gradings.  Of course, Smith’s Gradings has affirmed its credit assessments and refreshed the research.  Smith’s Recovery Grading was lowered to “1” from “3” because of consolidation in the tobacco industry. Smith’s Event Risk Grading of “-1” indicates the credit is subject to sudden shocks, in this case due to political risk and legal risks.   Smith’s Grading for tobacco bonds provides a dramatic illustration of how rating agencies have cost investors millions of dollars by providing generous credit assessments at the time issuance.

Default Studies

August 10, 2010

Under the Accountability and Transparency in Rating Agencies Act (subtitle B) section (6) “Historical Default Rate Disclosures” the rules and regulations of the SEC require each NRSRO (rating agency) to establish and maintain, on a publicly accessible Internet Site, a facility to disclose, in a central database, the historical default rates of all classes of financial products rated by such organization.  The Rating Agencies have chosen to interpret section 6 in different ways.  For example, each rating agency looks at defaults across different time horizons.   As a result of these differences, the ratings lack comparability. Moreover, the rating agencies have defined defaults as being only events of non-payment of debt service, whereas technical defaults under bond covenants are excluded (even though bondholders may suffer significant losses in market price).