Standard & Poor’s have announced that they are going to be putting credit stability at the heart of all their rating actions in future. When assigning ratings they will explicitly look at the issuer and security and adjust ratings accordingly if either has a particularly high risk of adverse changes to credit quality. The new approach will be applied over a period of six months and will be applied to both new and existing ratings.
This had to happen with the current turmoil and uncertainty in credit and financial markets. S&P have stated that there is a chance that this change could affect some catastrophe bonds. We expect that it will only be catastrophe bonds which are linked to debt in any way (bonds based on CDO structures perhaps) or catastrophe bonds which are issued by an entity with significant credit exposure. That should only affect a very few bonds and if the outcome is that most cat bonds are unaffected then that will be good for the market as it demonstrates the non-correlated nature of catastrophe bonds to the credit markets.
If any changes occur to cat bond ratings we’ll be sure to let you know.
Read the full announcement here (requires login).