DBRS to cut rating for
new ABCP notes
December 29, 2008 at 6:34 PM EST
TORONTO — DBRS Ltd. has lowered the rating it plans to give to new notes
that will come out of the 16-month process to fix the market for
$32-billion worth of frozen asset-backed commercial paper.
The Toronto-based credit rating agency said on Monday that it will be
assigning a single-A rating to the notes, because “a number of
challenges have arisen” since April, when it had said it expected to
assign a double-A rating.
Credit spreads have widened significantly and some of the assets that
were underlying the commercial paper have faced pressure.
DBRS was the only agency to rate the commercial paper before the market
seized up as a result of the liquidity crisis in August, 2007, and much
of the paper had received top ratings. A report by Canada's brokerage
industry regulator, the Investment Industry Regulatory Organization of
Canada, found that most brokerages selling the paper said they did not
conduct internal due diligence reviews of the complex product because
they relied on the high credit rating the paper received from DBRS. The
rating agency has taken significant heat as a result of its ratings.
It continues to be the only agency to rate the new notes. Yesterday,
rival Moody's Investors Service said it is not rating them.
On Christmas Eve, the committee that's been working to restructure the
frozen commercial paper market announced that it finally had a new plan
that should allow the market to thaw early in the new year, thanks in
part to support from the government and other backers.
A significant amount of the money that will be backing the restructuring
plan was conditional on the notes receiving a credit rating of at least
“We do not believe that the A rating will affect the ability of note
holders, who would have been able to hold AA rated notes, to hold the
restructured notes,” a source close to the committee said yesterday.
A number of investors, from corporations to pension plans, have rules
that outline the minimum credit rating an investment product must
receive in order for them to hold it.
The judge overseeing the restructuring of the market will be asked to
sign off on the committee's latest plan in January, after which the
commercial paper can be swapped for the new notes. It is not the first
time that the committee has presented a plan, but it now hopes the
restructuring will be completed by Jan. 16. A key element of this fix
was an agreement from Ottawa, Alberta, Quebec and Ontario to provide a
backstop credit line totalling $3.5-billion.
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