Structured Finance Credit Ratings

Joint Obligation Ratings in Consumer ABS

Thomas Adams, Ann Rutledge and Sylvain Raynes

Current rating agency practices do not appear to factor into the ratings of insured consumer asset-backed securities (ABS) the effects of correlation between an insurer default and a transaction default.  As a result, the rating agencies assign lower ratings to insured bonds from consumer ABS transactions even when the performance of the underlying assets and the performance of the insurer may have a low correlated probability of default.  In this article, a swell-known securitization attorney and two R&R principals show the significant and hitherto unacknowledged rating impact of correlation.  They provide a detailed analysis and conclude that a significant rating benefit could be conferred by the proper inverse correlation structure.