In today's credit market, when consumer delinquencies and losses are rising and most economists are predicting a recession, it is reasonable to wonder how far losses would have to rise for 'AAA' rated tranches or 'BBB' rated securities to be downgraded.
To answer this question, Standard & Poor's Ratings Services has published an article on RatingsDirect, titled, "Scenario Analysis: What Would It Take To Cause Downgrades On U.S. Auto Loan ABS?" describing a sensitivity analysis on a sample of auto loan asset-backed securities (ABS).
The primary focus of the analysis was to test the effect of various levels of losses while holding the other variables, such as prepayments, loss timing, and recoveries, constant. The article also describes other stress tests that were run to determine the potential rating effect of changes in loss timing and prepayments.
