Special Report: U.S. Negative CreditWatch Placement And The Knock-On Effects
|Publication date: 19-Jul-2011 01:24:22 HKT|
The CreditWatch action reflects our view of two separate but related issues. The first issue is the continuing failure to raise the U.S. government debt ceiling so as to ensure that the government will be able to continue to make scheduled payments on its debt obligations. The second pertains to our current view of the likelihood that Congress and the Administration will agree upon a credible, medium-term fiscal consolidation plan in the foreseeable future.
As the Obama Administration and congressional Republicans continue to struggle over raising the government's debt ceiling, we believe that the reverberations of the showdown may be deep and wide--particularly if Washington does not come to a timely agreement on the debt ceiling. Our analysts have considered three hypothetical scenarios that could emerge, which consider potential effects on the financial services industry, corporate borrowers, structured finance, public finance borrowers, as well as economies and markets around the world.
In our worst-case scenario, we would expect a systemic market disruption to follow the revision to 'SD' (selective default), which would have a significant impact on ratings in the financial institutions sector. If a selective default occurs, but without a systemic market disruption, we would expect this scenario to have less of an impact on global financial institutions ratings.
In light of the struggle in Washington over raising the government's debt ceiling, we have considered the possible ramifications for nonfinancial corporate borrowers under a number of hypothetical scenarios. This comes after our placement of the 'AAA' long-term and 'A-1+' short-term sovereign credit ratings on the United States of America on CreditWatch with negative implications on July 14.
Following the placement of the U.S. sovereign debt rating on CreditWatch with negative implications on July 14, Congress and the Obama Administration continue to struggle over raising the nation's debt ceiling and devising a long-term plan to reduce the federal deficit. Depending on how these issues are resolved, the current impasse could potentially–though not inevitably–cause widespread negative rating actions among U.S. public finance issuers in all sectors.
The impact of the recent negative CreditWatch placement affecting the 'AAA' long-term and 'A-1+' short-term sovereign ratings assigned to the United States of America on rated structured finance transactions will depend on the nature and magnitude of subsequent rating actions. On July 15, 2011, we placed our ratings on certain structured finance transactions on CreditWatch negative. The resolution of these CreditWatch placements will depend on whether the U.S. sovereign ratings change and the degree to which each structured finance transaction's payments might be affected by the change.
We placed several U.S.-based entities with direct links to, or reliance on, the federal government on CreditWatch with negative implications after last week's placement of the sovereign credit ratings on the United States of America on CreditWatch negative. These include certain 'AAA' rated insurers; clearinghouses and central securities depositories; select 'AAA' rated government-related entities; debt issued by financial institutions under the Temporary Liquidity Guarantee Program; certain fixed-income funds, exchange-traded funds, hedge funds, government investment pools, and unit investment trusts.
Last week, we placed the long-term issuer credit ratings and related issue ratings on three 'AAA' rated U.S. based clearinghouses and one CSD on CreditWatch with negative implications. The affected 'AAA' rated clearinghouses are Fixed Income Clearing Corp., National Securities Clearing Corp., and Options Clearing Corp. The CSD is The Depository Trust Co. We also placed the 'AAA/A-1+' ratings on Fannie Mae's and Freddie Mac's issues on CreditWatch with negative implications, given their direct reliance on the U.S. government.
Our placement of the sovereign credit ratings on the United States of America on CreditWatch negative will not affect the ratings or stable rating outlooks on four remaining U.S.-domiciled 'AAA' rated nonfinancial corporate issuers, including Automatic Data Processing Inc., ExxonMobil Corp., Johnson & Johnson, and Microsoft Corp. A change in the credit rating or outlook on a sovereign issuer does not necessarily lead to changes in the rating or outlook on similarly rated nonfinancial corporate issuers in that country.
The CreditWatch action follows the placement of the long-term and short-term sovereign credit ratings on the United States of America on CreditWatch with negative implications. The insurance groups are Knights of Columbus, New York Life Insurance Co., Northwestern Mutual Life Insurance Co., Teachers Insurance & Annuity Assoc. of America, and United Services Automobile Assoc., and Goldman Sachs Mitsui Marine Derivative Products LP (GSMMDP), which offers over-the-counter derivative products. The groups (excluding GSMMDP) maintain holdings of U.S. Treasury securities.
As a result of the negative CreditWatch placement of the sovereign rating assigned to the U.S., we placed our ratings on 604 structured finance transactions on CreditWatch negative. This represents approximately 3% of the total structured finance transactions we rate globally. These transactions had an original issuance amount of $373.67 billion.
On July 14, 2011, we placed our rating on the sovereign debt of the United States of America (AAA/A-1+) on CreditWatch with negative implications. This action affected U.S. public, nonsovereign debt instruments that are directly or indirectly backed by the U.S. As a result, Standard & Poor's placed the ratings on these debt issues on CreditWatch negative.
The CreditWatch placement of the ratings on the U.S. has no immediate effect on our 'A-' rating or stable outlook on the National Railroad Passenger Corp. (AMTRAK). The rating is based on a stand-alone credit profile of 'bbb', and what we categorize, under our criteria for government-related entities, as a moderately high likelihood of support from the U.S. government in a financial distress scenario. If the U.S. is downgraded to 'AA-' or below, however, we would lower the rating.
We placed certain public finance debt issues that have credit enhancement guaranteed in the form of a mortgage-backed security and backed by the full faith and credit pledge of the U.S. government on CreditWatch with negative implications following the placement of the United States of America on CreditWatch with negative implications. The 'AAA' rating on the affected debt issues is based on an MBS enhancement that makes mortgage payments in the event of a mortgage default.
The 'AAA' rating on the affected debt issues is based on the rating on either Fannie Mae or Freddie Mac, based on a guarantee of direct payment on the bonds, or in some circumstances, a guarantee to make mortgage payments in the event of a mortgage default. In the cases of the affected issues, the guarantee is irrevocable and is in place until bond maturity. As such, the bonds carry the rating on Fannie Mae or Freddie Mac.
Per our government-related entity (GRE) criteria, these GRE ratings are constrained by the long-term sovereign rating on the U.S. We derive our opinion of the support included in the ratings based on the links and roles attached to the supporting entity, the U.S. government. We also factor direct and indirect risks, such as annual appropriation risks for public housing subsidy, essentiality of service provided, and governmental programmatic support, into our standalone credit profile ratings.
Following the placement of the United States of America on CreditWatch with negative implications, we put the 'AAA' rated defeased bonds we rate on CreditWatch negative because they are secured by U.S. Treasury and U.S. agency securities.
The 'AAA' rating on the affected debt issues is based on the strength of the guarantees supporting the mortgage payments as well as the investments in which monthly mortgage payments are deposited to make semiannual bond payments. Because these investments rely on the U.S. sovereign rating, a CreditWatch negative placement on the U.S. sovereign causes us to place these affected issues on CreditWatch negative.
All of the lease rental payments supporting the various bonds, while subject to appropriation, are backed by the full faith and credit of the U.S.
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