Ratings were withdrawn for several of Genworth Financial’s life securitizations last week in what may be the first of many such actions for the life industry.
The four structures — River Lake I ($1.1 billion), River Lake II ($850 million), River Lake IV ($500 million) and Rivermont ($315 million) — had their public credit ratings withdrawn by Moody’s Investor Services.
In a statement, Moody’s said the action was consistent with the credit rating agency’s policy of withdrawing the ratings on wrapped structures where the financial guarantor falls below investment grade status.
A Genworth spokesman did not return calls for comment.
The move comes nine months months after MBIA, the financial guarantor on the Genworth deal, was downgraded to junk status.
River Lake I and River Lake II are Regulation XXX securitizations domiciled in South Carolina set up to fund the excess reserves of Genworth’s Life and Annuity Insurance Company. River Lake IV is also a Reg XXX securitization, but is domiciled in Bermuda.
Rivermont is a South Carolina-domiciled Reg AXXX securitization that covers blocks of universal life policies for Genworth.
Ratings on other Reg XXX and Reg AXXX securitizations may also see their ratings withdrawn, says Robert Riegel, managing director of Moody’s insurance group.
“It’s certainly possible,” Riegel says. “These securities were trading on the rating guarantor.”
Several life securitizations were issued into the capital markets in 2006 and 2007 without the sponsor publishing their underlying credit ratings. Rather, they wrapped the deals using financial surety companies such as MBIA and AMBAC, and used their credit worthiness to trade the securitizations in the secondary markets.
However, when the financial surety companies were downgraded following the 2008 subprime mortgage crisis, the life securizations suffered.
Riegel explains Moody’s policy is to withdraw ratings when the financial guarantor on a insurance securitization is downgraded below investment grade unless there is a public “underlying shadow rating.”
Shadow ratings are non-public reviews conducted by the sponsor to gauge the credit worthiness of a fixed income instrument where there is little or no secondary market.
Reigel says that although there was a shadow rating on the Genworth structures, the company decided not to make them public for “business reasons.”
“It’s up to the sponsor,” Reigel says. “If the underlying shadow rating is higher than that of the financial guarantor, the sponsor can have it published.”
Reigel says several factors can determine a life securitization’s shadow rating, including the rate of investment losses, the use of dutch auction rate securities and the understanding of higher funding costs.
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