S&P: End in sight for US subprime writedowns

Star,Saturday March 15, 2008

S&P: End in sight for US subprime writedowns

By LOONG TSE MIN

PETALING JAYA: Standard & Poor's Ratings Services (S&P) has issued a positive report stating that US banks' subprime mortgage write-downs could be coming to an end, but analysts are unconvinced on expectation that there would be more writedowns from outside the sector.

The analysts said problems were emerging in other types of bonds, including prime bonds such as agency bonds issued by home financing agencies Fannie Mae and Freddie Mac, and student loans agency Sallie Mae.

They said with about US$200bil of sub-prime related provisions already made, it was not far off from S&P's estimate of total write downs. In its report the same day, S&P raised its estimate of total sub-prime mortgage write-downs to US$285bil from US$265bil.

MIMB Investment Bank head of equity research Pong Teng Siew, when contacted by StarBiz said there was plenty of scope for more downgrades, adding that senior tranches of sub-prime securities, i.e those with first claim on assets, had yet to be downgraded.

He said the US Federal Reserve's rescue package announced on Tuesday would direct as much as US$200bil to banks and investment houses and would largely be spent on securities swaps with banks for AAA-rated securities, some of which were sub-prime related. He said most of investment community in the US was not impressed because these AAA securities could be further downgraded.

Meanwhile, Reuters quoted Payden & Rygel portfolio manager Mike Kagawa in Los Angeles as saying in reaction to S&P's report: “They must be seeing something I'm not. I just don't see it.”

However, most US analysts credited S&P's report with helping US stocks to rise for a second non-consecutive trading day this week.

The Dow Jones Industrial Average finished up 35.3 points, or 0.3%, to 12,145.7 on Thursday.

Aseambankers in its daily research note yesterday attributed the S&P report to the S&P500's 2.6% rebound from its overnight low to close at 1,315 points.

However, the research house added: “We remain cautions since the Bloomberg tally of the sub-prime related losses to date have reached only US$188.3bil, which means there could still be substantial write-downs ahead, going by S&P's assessment.”

“Moreover, the market has not factored in rising delinquency of marginal and even some prime mortgages, as well as credit card loans.

“Overall, we remain cautious on global equities given the present stagflation-like scenario in the US,'' said Aseambankers, which added that Thursday night's rebound could be a 'bear trap'.

The research outfit said it expects a “downside bias” to the global bourses as well as the KL Composite Index for the second quarter.