Nestled in the 2,300 pages of the new law that reshapes the U.S. financial landscape is a change affecting credit rating agencies, which were accused of helping cause the 2008 crisis.That change could have an unintended consequence, some experts say: Chilling the markets for securities linked to mortgages, credit cards and auto loans. Those markets froze up during the crisis and have been struggling to revive.
That's because the change will make it easier for investors to successfully sue credit rating agencies for recklessly assigning high ratings. As a result, the three major agencies — Moody's Investors Service, Standard & Poor's and Fitch Ratings — say they'll no longer let bond issuers list their ratings in public sale documents.
That could dampen the markets for asset-backed securities, because the agencies' ratings help set the prices that investors such as banks, mutual funds and local governments agree to pay.
But because their legal liability has potentially risen, the rating agencies "are going to be very reluctant" to have their ratings in offering documents, said Jesse Litvak, a managing director at Jefferies & Co.
"It's like pouring gasoline on a fire," Litvak said. "That's going to clog up the ability for any deals to get done."
Credit raters’ reactions to the U.S. financial-regulation law that boosts their legal risks are unlikely to “freeze” the securitization market even while forcing changes in practices and potentially slowing sales, RBS Securities Inc. and Bank of America Corp. analysts said.
Issuers will probably do more so-called private placement or 144a transactions, which can be bought only by large, sophisticated buyers and aren’t affected by the regulatory changes, Paul Jablansky, a senior debt strategist at Stamford, Connecticut-based RBS Securities, said in a telephone interview.
If they do, sales of new debt into the almost $4 trillion market for bonds backed by U.S. loans and leases can probably continue for a while at the same or only “slightly higher” yields over benchmarks, partly because “supply has not been particularly robust,” he said. Jablansky and Bank of America analysts, in a report, said a shift away from public deals registered with the Securities and Exchange Commission isn’t a “long-term” solution.
“Eventually if you drove enough issuance into the 144a market, the investors who can buy would require wider spreads,” said Jablansky, whose Royal Bank of Scotland Plc unit was the second-ranked underwriter of worldwide structured-finance deals last year, according to the newsletter Asset-Backed Alert. “That’s because they would have the leverage to get them.”
The financial legislation, signed today by President Barack Obama, eliminates credit-rating companies’ shield from lawsuits when underwriters include their assessments in documents used to sell debt. The law subjects ratings companies to so-called expert liability, which means the firms will face the same legal risks as accountants and other parties that participate in bond sales.
MAYBE THEY SHOULD HAVE THOUGHT THROUGH THIS CHANGE A BIT MORE BEFORE ENACTING IT DURING A RECESSION.
OR MAYBE THEY SHOULD HAVE AT LEAST READ THE BILL BEFORE VOTING FOR IT.
WE CAN FIX THIS AND OTHER THINGS THIS NOVEMEMBER: VOTE GOP!
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