The Standard and Poor's Painting the Picture of Rating and Likely Impact of Selective Defaults :
We could consider placing our ratings on most U.S. insurers on CreditWatch negative (including bond insurers), but not necessarily lower any ratings immediately. We expect that any potential downgrades would occur within 90 days and would average no more than two notches. The most affected subsector of U.S. insurance, in this scenario, would likely be life insurance and multiline insurance--if life insurance is a significant part of the consolidated insurance operation. The impact likely would be smaller for most property/casualty, reinsurance, and heath insurers.
During the financial crisis of 2008-2009, holding company liquidity was, in some cases, insufficient to meet debt maturities. However, we believe the liabilities that would be most at risk in scenario 3 are institutional short-term operating leverage programs, including securities lending, repurchase agreements, dollar rolls (a type of repurchase agreement), and other short-term match-funded businesses that rely solely on the ability to access the short-term funding markets. Over the past two years, balances in these programs have declined because of tightening spreads. Longer-term institutional liabilities, such as global funding agreements, are primary cash flow matched and shorter-term put features are less prevalent now than they were in the late 1990s. Insurers offering variable annuity-guaranteed benefits would be most sensitive to equity market declines, resulting in reserve increases and declining capital bases. However, many of these variable annuity contracts have restrictive withdrawal rights, so declines in equity markets would be less of a risk if the market disruption is temporary.
The CreditWatch action could extend to non-U.S. insurance groups (including Canada and Bermuda) that have large U.S. operations or U.S. sovereign investment concentrations, although the non-U.S. business would mitigate the impact. The indirect impact outside the U.S. could be marginally more downgrades for insurers with large U.S. operations or exposure to U.S. sovereign investments, although these would probably average no more than one notch. The greatest impact for insurers in Eastern Europe/Middle East/Africa would be in terms of capital adequacy, rather than funding and liquidity. The substantial increase in interest rates and credit spreads would have adverse implications for marked-to-market balance sheets, and weak equity markets would compound this. However, regulatory forbearance could result in little intervention.
We could consider placing our PSFRs and FCQRs on funds invested in U.S.-based issuers on CreditWatch negative given the uncertainty an ‘SD’ event would have on the U.S. financial system, investor behavior, and the ratings on issuers in other U.S. sectors (such as banks). Exposures to U.S.-based entities that could warrant a placement on CreditWatch negative include direct issuer exposure and counterparty transactions (such as repurchase agreements and swaps). The action would depend on whether we revise our rating on the U.S. to ‘SD’ and our prospective view of broader market volatility.
We currently rate 814 funds globally. We have PSFRs on 498 funds with approximately $2.5 trillion in assets and FCQR/FVRs (fund volatility ratings) on 316 funds with more than $400 billion. Of the 814 rated funds, approximately 550 are invested in U.S.-based issuers. We could place our ratings on these 550 funds on CreditWatch negative if we were to revise the U.S. rating to 'SD'.
With respect to Standard & Poor’s PSFRs, an ‘SD’ event might cause a material deviation in these funds' NAV per share and could expose them to extraordinarily high redemption requests, which could exacerbate a declining NAV. For any PSFRs that we would place on CreditWatch negative, we would obtain the daily marked-to-market NAV per share and asset balances for the funds to determine the impact of the ‘SD’ rating action and whether a deterioration in the funds' NAV warrants rating actions. If a U.S. downgrade to ‘SD’ caused interest rates and credit spreads to significantly affect the prices of short-term investments and the marked-to-market NAVs of rated funds to drop below the stated bands for each rating category (for example, the minimum NAV for 'AAAm' is $0.9975), then we could take rating actions. For example, if we put our rating on a fund that invests 100% in U.S. Treasuries on CreditWatch negative, and over the course of a week we observed its NAV decrease to $0.9974 from $1.0000 because of widening credit spreads coupled with large redemptions, we would likely downgrade the fund to ‘AAm’ (NAV minimum $0.9970) and keep the rating on CreditWatch negative. Should an NAV drop below $0.995 (that is, break the buck) we would downgrade the fund to 'Dm' because the fund would have failed to maintain its principal value.
Many PSFRs that are currently limited to investments in U.S. Treasury and agency securities have been positioning themselves to deal with an ‘SD’ event by attempting to avoid securities that mature in early August 2011. These funds are also maintaining above-average amounts of overnight liquidity (i.e., 50% in overnight repo) and an overall shorter weighted-average maturity to minimize the impact that spread widening and redemptions would have on their NAVs. Although this strategy puts the funds in a better position to deal with an ‘SD’ event, the ambiguity regarding how the markets would react to such an event would warrant, in our opinion, placing the ratings on these funds on CreditWatch negative.
In this scenario, it's unlikely that we would initially place our ratings on CreditWatch negative for funds that hold only investments that mature in one business day with issuers or counterparties not on CreditWatch negative, as well as for funds that hold exclusively non-U.S. dollar-denominated investments. However, if the market impact of this scenario spreads beyond the U.S. and global issuers across Standard & Poor’s rated universe experience rating actions, we could place our ratings on additional funds on CreditWatch negative.
It is important to note with respect to FVRs that if the ‘SD’ event caused a material loss in the underlying value of a rated fund's holdings and had a prolonged negative impact on the fund's total return profile, we could lower the FVR by one or more categories.
In this scenario, we could place the ratings on confidence-sensitive banks and broker/dealers (for example, those that rely on short-term funding markets) on CreditWatch negative. We could also lower the ratings on debt issued by financial institutions and guaranteed by the FDIC through its TLGP to the senior unsecured rating on each issuing entity. Short-term funding markets would likely seize, and brokers could struggle to pass daily liquidity tests. U.S. Treasuries used as collateral could fall in value, leading to margin calls. Banks would likely struggle to borrow in the interbank market. Falling equity markets and a rise in interest rates could affect the value of balance sheet assets for big banks and broker/dealers. Banks and brokers may also have to pay out redemptions on sponsored funds, which may further deplete cash reserves, and honor drawdowns on committed credit lines, which would further pressure liquidity. Questions about the viability of deposit insurance could lead to runs on banks if the rating on the U.S. remains at 'SD' for several weeks. In response, banks would likely stop uncommitted lending, which could include consumer lending, to conserve liquidity.
We could lower our debt ratings on Fannie Mae and Freddie Mac to 'C'--our lowest issue-level rating--to reflect our view of their significant risk of a near-term payment default. We could also lower our rating on the Federal Home Loan Bank System's (FHLB) debt to the lowest system bank’s stand-alone credit profile (because of their joint and several liability) and place the ratings on CreditWatch negative. In addition, we could lower our ratings on the Federal Farm Credit System's debt to its stand-alone credit profile and place the ratings on CreditWatch negative. Furthermore, we could downgrade individual banks in the FHLB and Farm Credit systems to their unsupported stand-alone credit profiles and place the ratings on the banks on CreditWatch negative. The weakening dollar and wider spreads would likely have a significant impact on the funding costs of the GSEs, while the longer-term economic malaise could hurt their operations. Questions about the U.S.’ ability to support Fannie Mae and Freddie Mac could have the greatest impact on their funding costs.
As the U.S. sovereign rating rebounds, assuming the U.S. government reiterates its support of Fannie Mae and Freddie Mac, we would equalize the ratings on the GSEs' debt with the sovereign rating. We would also likely raise the FHLB and Farm Credit debt ratings back to the sovereign level, and we would reevaluate system banks to determine stand-alone credit profiles and levels of support.
We believe the impact on the industry could be high, especially if the rating on the U.S. remains at ‘SD’ for an extended period. As a result, we could keep our ratings on Fixed Income Clearing Corp. (FICC), National Securities Clearing Corp. (NSCC), Options Clearing Corp. (OCC), and The Depository Trust Corp. (DTC) on CreditWatch negative. We do not expect that we would revise our ratings on these four entities to ‘SD’ because we would expect that the sovereign ‘SD’ designation would be short term and that these four financial institutions would continue to meet their clearing and settlement obligations during that time, barring a meltdown of the entire U.S. financial system.
We understand the four ‘AAA’ rated entities and the clearinghouse units of CME Group are taking precautionary measures to protect their financial safeguard systems in the event of broad market disruptions. They are preparing to increase margin and guaranty fund requirements, possibly impose additional intraday margin calls, and curtail risk exposures at member firms experiencing financial duress. In addition, they are conducting "war games," in which they practice closing out positions of large members. Such actions would not be new--they did the same during the 2008-2009 global credit crisis. (During that time, we maintained the ratings on the three rated U.S. clearinghouses and DTC because they fulfilled their clearing and settlement obligations as expected.)
In general, wholesale funding market disruptions pose the biggest risks to finance companies because most finance companies do not have access to deposits. The immediate issue would be a deterioration in economic and market conditions that affects profitability and could lead to higher cash needs. Factors that could lead to an increase in delinquencies for balance sheet-intensive companies, such as rising unemployment or decreased demand for financial services companies, could pose the most immediate risks. We also think companies that hold assets that need to be marked to market on a regular basis would face substantial difficulties, especially companies in commercial real estate, which, in our opinion, remain under significant pressure.
Our immediate response could include placing our ratings on asset managers with significant business managing money market funds on CreditWatch negative until we have a better understanding of the impact of any potential redemption activity that could result from an 'SD' event. If the U.S. sovereign ratings remained at ‘SD’ for an extended period, that could lead to significant redemption activity out of money market funds. In addition, a stock market drop could cause managed asset balances to decline across our rated universe because of both redemptions and market depreciation. In the longer term, depending on the severity and duration of the stock market shock, we might need to take negative rating actions on some of the more highly leveraged asset managers if their financial metrics weakened because of a reduction in assets under management, which could adversely affect cash flow from operations.
We believe that the biggest risk for alternative asset managers would be managing short-term liquidity, consistent with the 2008-2009 financial crisis. We rate a small number of alternative asset managers relative to the industry, and we believe that we could take a few rating actions in the short term. Any rating action would be the indirect result of liquidity issues arising from margin calls triggered by poor performance and asset value declines, coupled with redemption requests from investors at hedge funds. We could experience a bifurcation of alternative managers into those that benefit from the market disruption and those that have to deal with asset value declines, margin calls, and capital outflows. This scenario likely would have a bigger impact on hedge funds than private equity managers, at least in the short term. We could consider rating actions in the case of a broad decline in asset values because many managers generate their revenues based on assets under management.
( All in all, All this would affect 401(K) into a Huge difficulties, $ Index May sink Below 72, and Gold to jump by 7-9%, So on and So Forth. The Lehmann would appear as small blip in 2008 on Charts ).
U.S. insurance:
We could consider placing our ratings on most U.S. insurers on CreditWatch negative (including bond insurers), but not necessarily lower any ratings immediately. We expect that any potential downgrades would occur within 90 days and would average no more than two notches. The most affected subsector of U.S. insurance, in this scenario, would likely be life insurance and multiline insurance--if life insurance is a significant part of the consolidated insurance operation. The impact likely would be smaller for most property/casualty, reinsurance, and heath insurers.
During the financial crisis of 2008-2009, holding company liquidity was, in some cases, insufficient to meet debt maturities. However, we believe the liabilities that would be most at risk in scenario 3 are institutional short-term operating leverage programs, including securities lending, repurchase agreements, dollar rolls (a type of repurchase agreement), and other short-term match-funded businesses that rely solely on the ability to access the short-term funding markets. Over the past two years, balances in these programs have declined because of tightening spreads. Longer-term institutional liabilities, such as global funding agreements, are primary cash flow matched and shorter-term put features are less prevalent now than they were in the late 1990s. Insurers offering variable annuity-guaranteed benefits would be most sensitive to equity market declines, resulting in reserve increases and declining capital bases. However, many of these variable annuity contracts have restrictive withdrawal rights, so declines in equity markets would be less of a risk if the market disruption is temporary.
Global insurance:
The CreditWatch action could extend to non-U.S. insurance groups (including Canada and Bermuda) that have large U.S. operations or U.S. sovereign investment concentrations, although the non-U.S. business would mitigate the impact. The indirect impact outside the U.S. could be marginally more downgrades for insurers with large U.S. operations or exposure to U.S. sovereign investments, although these would probably average no more than one notch. The greatest impact for insurers in Eastern Europe/Middle East/Africa would be in terms of capital adequacy, rather than funding and liquidity. The substantial increase in interest rates and credit spreads would have adverse implications for marked-to-market balance sheets, and weak equity markets would compound this. However, regulatory forbearance could result in little intervention.
U.S. funds:
We could consider placing our PSFRs and FCQRs on funds invested in U.S.-based issuers on CreditWatch negative given the uncertainty an ‘SD’ event would have on the U.S. financial system, investor behavior, and the ratings on issuers in other U.S. sectors (such as banks). Exposures to U.S.-based entities that could warrant a placement on CreditWatch negative include direct issuer exposure and counterparty transactions (such as repurchase agreements and swaps). The action would depend on whether we revise our rating on the U.S. to ‘SD’ and our prospective view of broader market volatility.
We currently rate 814 funds globally. We have PSFRs on 498 funds with approximately $2.5 trillion in assets and FCQR/FVRs (fund volatility ratings) on 316 funds with more than $400 billion. Of the 814 rated funds, approximately 550 are invested in U.S.-based issuers. We could place our ratings on these 550 funds on CreditWatch negative if we were to revise the U.S. rating to 'SD'.
With respect to Standard & Poor’s PSFRs, an ‘SD’ event might cause a material deviation in these funds' NAV per share and could expose them to extraordinarily high redemption requests, which could exacerbate a declining NAV. For any PSFRs that we would place on CreditWatch negative, we would obtain the daily marked-to-market NAV per share and asset balances for the funds to determine the impact of the ‘SD’ rating action and whether a deterioration in the funds' NAV warrants rating actions. If a U.S. downgrade to ‘SD’ caused interest rates and credit spreads to significantly affect the prices of short-term investments and the marked-to-market NAVs of rated funds to drop below the stated bands for each rating category (for example, the minimum NAV for 'AAAm' is $0.9975), then we could take rating actions. For example, if we put our rating on a fund that invests 100% in U.S. Treasuries on CreditWatch negative, and over the course of a week we observed its NAV decrease to $0.9974 from $1.0000 because of widening credit spreads coupled with large redemptions, we would likely downgrade the fund to ‘AAm’ (NAV minimum $0.9970) and keep the rating on CreditWatch negative. Should an NAV drop below $0.995 (that is, break the buck) we would downgrade the fund to 'Dm' because the fund would have failed to maintain its principal value.
Many PSFRs that are currently limited to investments in U.S. Treasury and agency securities have been positioning themselves to deal with an ‘SD’ event by attempting to avoid securities that mature in early August 2011. These funds are also maintaining above-average amounts of overnight liquidity (i.e., 50% in overnight repo) and an overall shorter weighted-average maturity to minimize the impact that spread widening and redemptions would have on their NAVs. Although this strategy puts the funds in a better position to deal with an ‘SD’ event, the ambiguity regarding how the markets would react to such an event would warrant, in our opinion, placing the ratings on these funds on CreditWatch negative.
In this scenario, it's unlikely that we would initially place our ratings on CreditWatch negative for funds that hold only investments that mature in one business day with issuers or counterparties not on CreditWatch negative, as well as for funds that hold exclusively non-U.S. dollar-denominated investments. However, if the market impact of this scenario spreads beyond the U.S. and global issuers across Standard & Poor’s rated universe experience rating actions, we could place our ratings on additional funds on CreditWatch negative.
It is important to note with respect to FVRs that if the ‘SD’ event caused a material loss in the underlying value of a rated fund's holdings and had a prolonged negative impact on the fund's total return profile, we could lower the FVR by one or more categories.
U.S. banks and broker/dealers:
In this scenario, we could place the ratings on confidence-sensitive banks and broker/dealers (for example, those that rely on short-term funding markets) on CreditWatch negative. We could also lower the ratings on debt issued by financial institutions and guaranteed by the FDIC through its TLGP to the senior unsecured rating on each issuing entity. Short-term funding markets would likely seize, and brokers could struggle to pass daily liquidity tests. U.S. Treasuries used as collateral could fall in value, leading to margin calls. Banks would likely struggle to borrow in the interbank market. Falling equity markets and a rise in interest rates could affect the value of balance sheet assets for big banks and broker/dealers. Banks and brokers may also have to pay out redemptions on sponsored funds, which may further deplete cash reserves, and honor drawdowns on committed credit lines, which would further pressure liquidity. Questions about the viability of deposit insurance could lead to runs on banks if the rating on the U.S. remains at 'SD' for several weeks. In response, banks would likely stop uncommitted lending, which could include consumer lending, to conserve liquidity.
U.S. GSEs:
We could lower our debt ratings on Fannie Mae and Freddie Mac to 'C'--our lowest issue-level rating--to reflect our view of their significant risk of a near-term payment default. We could also lower our rating on the Federal Home Loan Bank System's (FHLB) debt to the lowest system bank’s stand-alone credit profile (because of their joint and several liability) and place the ratings on CreditWatch negative. In addition, we could lower our ratings on the Federal Farm Credit System's debt to its stand-alone credit profile and place the ratings on CreditWatch negative. Furthermore, we could downgrade individual banks in the FHLB and Farm Credit systems to their unsupported stand-alone credit profiles and place the ratings on the banks on CreditWatch negative. The weakening dollar and wider spreads would likely have a significant impact on the funding costs of the GSEs, while the longer-term economic malaise could hurt their operations. Questions about the U.S.’ ability to support Fannie Mae and Freddie Mac could have the greatest impact on their funding costs.
As the U.S. sovereign rating rebounds, assuming the U.S. government reiterates its support of Fannie Mae and Freddie Mac, we would equalize the ratings on the GSEs' debt with the sovereign rating. We would also likely raise the FHLB and Farm Credit debt ratings back to the sovereign level, and we would reevaluate system banks to determine stand-alone credit profiles and levels of support.
U.S. exchanges, clearinghouses, and central securities depository:
We believe the impact on the industry could be high, especially if the rating on the U.S. remains at ‘SD’ for an extended period. As a result, we could keep our ratings on Fixed Income Clearing Corp. (FICC), National Securities Clearing Corp. (NSCC), Options Clearing Corp. (OCC), and The Depository Trust Corp. (DTC) on CreditWatch negative. We do not expect that we would revise our ratings on these four entities to ‘SD’ because we would expect that the sovereign ‘SD’ designation would be short term and that these four financial institutions would continue to meet their clearing and settlement obligations during that time, barring a meltdown of the entire U.S. financial system.
We understand the four ‘AAA’ rated entities and the clearinghouse units of CME Group are taking precautionary measures to protect their financial safeguard systems in the event of broad market disruptions. They are preparing to increase margin and guaranty fund requirements, possibly impose additional intraday margin calls, and curtail risk exposures at member firms experiencing financial duress. In addition, they are conducting "war games," in which they practice closing out positions of large members. Such actions would not be new--they did the same during the 2008-2009 global credit crisis. (During that time, we maintained the ratings on the three rated U.S. clearinghouses and DTC because they fulfilled their clearing and settlement obligations as expected.)
U.S. finance companies:
In general, wholesale funding market disruptions pose the biggest risks to finance companies because most finance companies do not have access to deposits. The immediate issue would be a deterioration in economic and market conditions that affects profitability and could lead to higher cash needs. Factors that could lead to an increase in delinquencies for balance sheet-intensive companies, such as rising unemployment or decreased demand for financial services companies, could pose the most immediate risks. We also think companies that hold assets that need to be marked to market on a regular basis would face substantial difficulties, especially companies in commercial real estate, which, in our opinion, remain under significant pressure.
U.S. traditional asset managers:
Our immediate response could include placing our ratings on asset managers with significant business managing money market funds on CreditWatch negative until we have a better understanding of the impact of any potential redemption activity that could result from an 'SD' event. If the U.S. sovereign ratings remained at ‘SD’ for an extended period, that could lead to significant redemption activity out of money market funds. In addition, a stock market drop could cause managed asset balances to decline across our rated universe because of both redemptions and market depreciation. In the longer term, depending on the severity and duration of the stock market shock, we might need to take negative rating actions on some of the more highly leveraged asset managers if their financial metrics weakened because of a reduction in assets under management, which could adversely affect cash flow from operations.
U.S. alternative asset managers:
We believe that the biggest risk for alternative asset managers would be managing short-term liquidity, consistent with the 2008-2009 financial crisis. We rate a small number of alternative asset managers relative to the industry, and we believe that we could take a few rating actions in the short term. Any rating action would be the indirect result of liquidity issues arising from margin calls triggered by poor performance and asset value declines, coupled with redemption requests from investors at hedge funds. We could experience a bifurcation of alternative managers into those that benefit from the market disruption and those that have to deal with asset value declines, margin calls, and capital outflows. This scenario likely would have a bigger impact on hedge funds than private equity managers, at least in the short term. We could consider rating actions in the case of a broad decline in asset values because many managers generate their revenues based on assets under management.
( All in all, All this would affect 401(K) into a Huge difficulties, $ Index May sink Below 72, and Gold to jump by 7-9%, So on and So Forth. The Lehmann would appear as small blip in 2008 on Charts ).
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