Standard & Poor’s Ratings Services broadly estimates that valuation write-downs of subprime asset-backed securities–primarily collateralized debt obligations (CDOs) of ABS but also subprime residential mortgage-backed securities (RMBS)–could reach $285 billion for the global financial sector, but that the end of write-downs is now in sight for large financial institutions.
In a report published, “Subprime Write-Downs Could Reach $285 billion, But Are Likely Past The Halfway Mark,” Standard & Poor’s notes that the figure is slightly higher than the $265 billion it published earlier this year because it since then has increased its assumption of percentage write-downs of high-grade CDOs of ABS with collateral from 2006 and 2007.
“The positive news is that, in our opinion, the global financial sector appears to have already disclosed the majority of valuation write-downs of subprime ABS,” said Standard & Poor’s credit analyst Scott Bugie, lead author of the report.
In a companion report also published, “More Subprime Write-Downs To Come, But The End Is Now In Sight For Large Financial Institutions,” Standard & Poor’s notes that in particular the bulk of the write-downs of subprime securities may be behind the banks and brokers that have already announced their results for full-year 2007.
“There may be some additional marks to market as market indicators have shown deterioration in the first quarter. However, when we dissect the percentage of write-downs taken against various types of exposures, in our opinion the magnitude of some write-downs is greater than any reasonable estimate of ultimate losses,” said Standard & Poor’s credit analyst Tanya Azarchs, lead author of that report.
“Based on available information, we believe that the largest players can be seen as having undertaken a rigorous valuation methodology to come up with conservative valuations,” added Azarchs.
“But right now, market forces are placing further downward pressure on valuations, and we expect to see more write-downs related to these pressures in coming weeks and months,” Bugie said.
“We believe that any near-term positive impact of reducing subprime risk in the financial system via increased disclosure and write-downs will be offset by worsening problems in the broader U.S. real estate market and in other segments of the credit markets,” he added.
A major re-pricing of credit risk is taking place across the debt markets, with credit spreads having further widened in most segments since the beginning of 2008, after opening up in the second half of 2007.
If the wider spreads hold to the end of the first quarter or half of this year, financial institutions will suffer further market value write-downs of a broad range of exposures, including leveraged loans.
