Negative Following U.S. Sovereign Downgrade,” published Aug. 8, 2011.) We expect to resolve those CreditWatch placements, either through an affirmation of the rating or through a downgrade over the next few weeks.
Some transactions that were previ- ously on CreditWatch for reasons not related to the sovereign downgrade may remain on CreditWatch until the non- sovereign related issues are addressed.
The affected structured finance transac- tions generally are in one of the following categories. First, principal protected notes which are generally collateralized by the U.S. Treasury strips or securities issued by a GRE; defeased transactions such as tobacco settlement securitizations in which all the liabilities have been offset by Treasuries or other government obliga- tions; transactions with defeased loan col- laterals such as certain CMBS transac- tions; and transactions with ratings directly or partially linked to the U.S. gov- ernment such as through a guaranty from a government agency or a GRE.
As was pointed out earlier, our cri- teria does allow us to rate transactions higher than the sovereign rating. In fact, we currently have ratings on structured finance transactions above their respective sovereign ratings around the world, and covering a range of asset types including asset- backed securities, residential mort- gage-backed securities, commercial asset-backed securities, and collateral- ized debt obligations.
So we are not barred from rating these structured finance transactions as high as ‘AAA’.
Schachne: We have a question, again going back to public finance, about the one-notch limit as to how many notches a state government may be above the U.S. sovereign rating. Can you discuss that in a little more detail?
Murphy: This is an important point from the question that was in the release on Monday. There’s generally a one-notch limit. And the reason for that is that there are significant inter- dependencies, whether economic, fed-
eral revenue, the economic perform- ance of locals is not completely divorced from the economic happen- ings at the federal level.
So we feel that generally it’s limited to one notch at the current time under our current criteria. Laura, you have any- thing else to add to that?
Feinland Katz: No. We would consider on a case-by-case basis, depending on the linkages to the state economic envi- ronment, the government, the federal economic environment, linkages to pay- ments due from the government on a case-by-case basis.
Murphy: Gabe, would you like to add anything to that?
Gabriel Petek: We’re looking through state budgets and we recognize the role of the federal government in providing a lot of funding, but in a lot of ways, state governments are autonomous actors and we continue to look at them on their own merits and according to our criteria.
Schachne: A related question is, is there a specific schedule for when S&P will be reviewing states’ ratings, and specificly the exposure or reliance on the U.S.?
Murphy: There’s not a specific schedule right now. When we know the details of the federal expense reduction plan, we will prioritize accordingly and review the credits.
Schachne: What is the review process for bonds secured in whole or part by federal highway transit funds?
Peter Murphy: There’s no change in our approach to the Garvee ratings or bonds secured by federal transit funds. There are two types.
Some support highways and some support transit systems, but our cri- teria is the same for both. In general that sector is rated fairly high. The lowest senior lien rating we have is ‘A’, and they go as high as ‘AAA’ because
some bonds are hybrids with some state funds mixed in.
And we feel that as a sector in general the coverage is very high and can with- stand some reductions in federal pay- ments, which is a possibility for future federal budgets.
Schachne: A question for Bob Chiriani on the structured finance side: Will there be an impact on Federal Family Education Loan Program securities as a result of the downgrade?
Chiriani: If you go to the consolidated list that we published on Aug. 8, you’ll find a number of those transactions are listed there. They are on CreditWatch negative and we are looking to resolve those as quickly as possible over the next few weeks.
Schachne: For a list of the securities that were impacted, published articles on the downgrade and its ripple effects, a video interview with David Beers and John Chambers, and replays of the tele- conference calls on the sovereign and other asset classes, please go to our web- site, www. standardandpoors.com. CW
Standard & Poor’s CreditWeek | August 17, 2011 66
Analytical Contacts:
Nikola G. Swann Toronto (1) 416-507-2582
Laura Feinland Katz New York (1) 212-438-7893
Matthew Albrecht New York 212-438-1867
Rodney A. Clark New York (1) 212-438-7245
Steven J. Murphy New York (1) 212-438-2066
Valerie White New York (1) 212-438-2078
Peter V. Murphy New York (1) 212-438-2065
Gabriel Petek San Francisco (1) 415-371-5042
Ronald M. Barone New York (1) 212-438-7662
Robert Chiriani New York (1) 212-438-1271
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