Friday, July 23, 2010

SEC Breaks Impasse With Rating Firms

The Securities and Exchange Commission moved to defuse turmoil in the bond markets caused by ratings firms' refusal to allow their credit ratings to be used in deal documents.

Late Thursday the agency said it would temporarily allow bond sales to go ahead without credit ratings in bond offering documents, a move that would end an effective stalemate between ratings agencies and issuers.

The two sides had been at odds over changes enacted Wednesday in the landmark financial reform bill. The new law regards bond-ratings firms as "experts" and holds them liable for the quality of their ratings.

But the firms, including Moody's Investor Service, Standard & Poor's, Fitch Ratings and others, have said that the new standard creates too much risk for them. That's why they've begun withholding permission to use ratings on new bond issues. The problem is that big parts of the bond markets -- notably the asset-backed securities -- require a rating by law.

The SEC's waiver will be in place for six months. But the SEC said its action doesn't change or negate the new laws governing ratings agencies that came into effect with the signing of the Dodd-Frank bill this week.

"This action will provide issuers, rating agencies and other market participants with a transition period in order to implement changes to comply with the new statutory requirement while still conducting registered ABS offerings," said Meredith Cross, director of the SEC's division of corporation finance.

The ratings agencies' refusal to stand behind their own ratings had shut down the $1.4 trillion market for asset-backed securities for the past few days, scuttling several offerings, including one by Ford Motor Co.'s financing arm.

"It appears this could alleviate short-term pressure and provide temporary relief so new issuance can get done," said Paul Jablansky, an ABS strategist at the Royal Bank of Scotland.
Meeting Ms. Schapiro

Rating firms have been lobbying hard on the issue. On Tuesday, S&P President Deven Sharma met with SEC Chairman Mary Schapiro to discuss a variety of topics, including the rule change, according to a person familiar with the matter.

Mr. Sharma recently voiced concerns that ratings providers might have to change their practices because of the new laws.

S&P, a unit of McGraw-Hill Cos., declined to comment on the SEC's decision.
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A spokesman for Fitch, a unit of Fimalac SA, said the agency's action "should afford market participants with a window to consider various implications of the new law and develop modified practices as appropriate." He said the firm is still concerned about being exposed to "expert liability."

A spokesman for Moody's, a unit of Moody's Corp., said: "We strongly support efforts to remove ratings from regulation and will continue to work with regulators and market participants to implement relevant aspects of the Dodd-Frank bill as effectively as possible."

"The SEC's action gives welcome relief to the ABS markets, which have been pummeled in recent days by uncertainty as a result of the recent adoption of the Dodd-Frank Act," said Lewis Cohen, partner at Clifford Chance LLP. "People will still wonder what the next steps are and how things will play out after the exemption runs out. It's still a wide-open question as to how things will play out in the longer term."

The SEC's waiver will be in place for six months.

Under the new laws, the ratings companies are no longer exempt from the classification of "expert," a title that brings with it potentially greater liabilities, akin to those of lawyers or auditors who offer expert opinions.
Almost a Victory

Ratings companies have been trying to fend off the issue for months and, at one point, it seemed like they had succeeded. But a small clause re-emerged late in the process of pulling the financial laws together.

In October 2009, the SEC sought comments from industry participants about whether it should propose rescinding the "expert" exemption for credit ratings in securities registration statements. The SEC wanted to know what impact that might have on markets in light of the rating industry's growth and how investors use credit ratings.

In December, rating-company representatives submitted letters arguing against such a rescission. S&P said it believed rescinding the rule "would result in troubling and unintended consequences for the market, including reduced transparency due to issuers providing less information to investors." Earlier this year, representatives of S&P and Moody's met with the SEC to discuss the issue.

Some large investors have supported removing the exemption. In an April letter to the SEC, the California Public Employees' Retirement System said "making credit rating agencies civilly liable for misstatements or omissions which they cause to be placed in securities offerings" would represent "a large step forward in deterring harmful conduct" by credit raters in the structured-finance area.
—Aaron Lucchetti and Serena Ng contributed to this article.
A Rally in 'Junk'

Two new high-yield corporate bonds came to market Thursday amid a rally in the broader secondary market, as riskier, "junk"-rated corporate securities regained favor with investors.

Junk bonds were up nearly across the board in secondary market trade, led by large borrowers like First Data Corp. and Freescale Semiconductor, both of which underwent large leveraged buyouts during the credit boom several years ago.

In the primary market, the pair of deals Thursday brought to seven the number of new issues seen so far this week, worth a combined $4.8 billion. That compares to four deals worth $2.1 billion last week, according to data provider Dealogic.

Accuride Corp., an auto supplier that recently emerged from bankruptcy, sold $310 million of senior secured eight-year notes to yield 10%, with proceeds to refinance its bankruptcy-exit funding.

Entravision Communication Corp., a Spanish-language media company, sold $400 million of senior secured 7-year notes to yield 9%, with proceeds to repay bank debt.
—Michael Aneiro
Treasury Prices Fall

Prices of Treasury securities fell as better-than-forecast global data and strong U.S. corporate earnings spurred a strong rally in the stock market, reducing demand for safe assets.

The two-year note's yield rose from the record low of 0.545% hit overnight while the benchmark 10-year note's yield bounced up off a 15-month low. Long-dated securities bore the bulk of the selling, reversing Wednesday's gains.

"It is a risk-on day, so Treasurys pay the price," said Ward McCarthy, chief financial economist within the fixed income group at Jefferies & Co.

The benchmark 10-year note was down 10/32 point, or $3.125 per $1,000 face value, at 104 27/32. Its yield rose to 2.928% from 2.893% Wednesday, as yields move inversely to prices. The 30-year bond was down 28/32 point to yield 3.946%.
—Min Zeng

Write to Anusha Shrivastava at and Fawn Johnson at

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