hasn’t changed, our ratings actions reflect our view that the link between their rat- ings and the credit quality of the sover- eign could lead to a decline in the insurers’ financial strength. We base this on the fact that the companies’ businesses and assets are highly concentrated in the U.S. and generally have significant hold- ings of U.S. Treasury and agency securi- ties. For the insurers with the most expo- sure, these investments constitute as much as 200% of total adjusted capital at year- end 2010. We believe the 10 affected groups have very strong financial profiles and favorable business profiles to support the ‘AA+’ ratings, and that they maintain very strong capital and liquidity.

Clearinghouses Standard & Poor’s lowered its long- term counterparty credit ratings on The Depository Trust Co., National Securities Clearing Corp., Fixed Income Clearing Corp., and Options Clearing Corp. to ‘AA+’ from ‘AAA’.

The downgrades incorporate poten- tial incremental shifts in the economic environment and the long-term stability of the U.S. capital markets as a result of the decline in the creditworthiness of the federal government rather than any change in our view of the fundamental soundness of the companies’ depository or clearing operations.

Funds We also lowered our fund credit quality ratings (FCQRs) on 73 funds of the 206 funds managed in the U.S., Europe, and Bermuda. We lowered the fund ratings, 70 of which were ‘AAAf’, up to two notches, depending on the funds’ long- term exposure to the U.S. sovereign. At the same time, we removed all 73 funds from CreditWatch negative, and the fund volatility ratings were unaffected.

FCQRs reflect our view of the level of protection a fund provides against losses from credit defaults, and address a fund’s overall exposure to default risk. We apply a set of credit factors for each rating category and a set of credit scores for each FCQR category, based on our historical ratings stability and ratings transition studies.

Structured Finance Meanwhile, our ratings on 744 struc- tured finance transactions remain on CreditWatch with negative implications following the lowering of the sovereign credit rating. We had placed the ratings assigned to the securities on CreditWatch negative due to potential exposure to the U.S. rating, and we will review the affected transactions, as well as any additional transactions we expect may be affected, and take rating actions we view as appropriate. These transactions have a link to the U.S. sov- ereign rating due to various reasons, including: transactions backed by U.S. government obligations, including defeased securities, and transactions that benefit from full or partial govern- ment guarantees.

We expect to lower the ratings on most of the affected transactions to a level no higher than the sovereign.

Nonfinancial Corporate Borrowers Generally, a change in the credit rating of a sovereign issuer doesn’t necessarily lead to a change in ratings or outlooks on sim- ilarly rated nonfinancial corporate bor- rowers in that country. A corporate bor- rower’s ratings may exceed those on the sovereign if we expect the company would continue to fulfill its financial obli- gations, even after a sovereign default. Depending on an industry’s or individual company’s financial strength, a borrower may be well positioned to withstand eco- nomic shocks or other country-related risks. In this light, our downgrade of the U.S. hasn’t affected our ratings or stable outlooks on the four remaining U.S.- based ‘AAA’ rated corporate issuers: Automatic Data Processing Inc. (ADP), ExxonMobil Corp., Johnson & Johnson, and Microsoft Corp. CW

21 www.creditweek.com

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