TALF Revives Need For Structured Bond Raters

Structured credit analysts, take note: Credit rating firms may soon need your services again.

The first deals backed by the Federal Reserve's new Term Asset-Backed Securities Loan Facility (TALF) reached the market this week. Those bonds - auto loan ABS from Ford and Nissan totaling $4.3 billion, plus $3 billion Citigroup credit-card ABS - set the stage for as much as $1 trillion of ABS deals that could be issued in coming months.

Moody's, Standard & Poor's and Fitch Ratings stand to benefit because their seal of approval is required for such deals. The firms charge structured bond issuers between 4 - 12 basis points of a deal's face value, according to The Wall Street Journal. So they stand to earn as much as $240 million in revenue from the initial $200 billion phase of the TALF program, and up to $1.2 billion if the program is extended and ABS issuance reaches $1 trillion.

"The government, hoping to protect itself from losses, will allow its money only to be used to buy securities rated triple-A by the ratings services," the Journal says. Each bond issue requires ratings from at least two of the three big rating firms.

Those same rating agencies are under fire, however, because their models grossly underestimated the credit risk of a wide range of bonds, including ABS, that were exposed to mortgages. The Fed has expressed confidence that the agencies will assign "appropriate" ratings to securities eligible for the new program.

The Journal reports Moody's revenue from rating structured bond deals plunged 53 percent last year, to $411 million, shrinking to about a third of overall revenue compared with more than half in previous years.

Reviving the ABS market is a major goal for the Fed because it would help lower interest rates for various categories of consumer loans and thus support consumer spending.