Fitch Revises Counterparty Criteria for Global Structured Finance Transactions
Fitch Ratings-London/New York/Sydney-22 October 2009: Fitch Ratings has today revised its rating criteria for counterparty risk in structured finance transactions. The new criteria follows consultation with market participants representing a wide array of interested opinion, including investors, issuers, arrangers, swap desks, regulators and central banks in the wake of an exposure draft published in March 2009.
The core criteria remains largely unchanged from the previous criteria and expects counterparties to have a minimum Fitch Long-term Issuer Default Rating (IDR) of 'A' and a minimum Short-term IDR of 'F1' to support notes of 'AA-' or higher. If collateral is posted, however, this core criteria is extended to counterparties rated at or above 'BBB+'/'F2'. For the purpose of rating new transactions, the core criteria has been enhanced by treating counterparties that are on Rating Watch Negative (RWN) as one notch below their actual current rating for eligibility purposes, to mitigate any potential short term adverse rating action. Aspects of criteria that are specific to derivative contracts used in securitisation transactions are detailed in a dedicated criteria report published alongside the core counterparty criteria report.
"Fitch chose not to pursue the primary option outlined in the exposure draft of expecting collateralisation of derivatives from closing. The agency saw this as being the theoretical option that could best maximise structured finance transaction isolation from underlying counterparty risk. However, the reality is that the market in structured finance derivatives does not operate on this basis, at this time," says Stuart Jennings, Fitch's Credit Risk Officer. "Adopting it now would have restricted the universe of eligible counterparties, thereby undermining one of the assumptions of the criteria - the replaceability of counterparties. Its application to existing transactions could also have potentially led onto renewed liquidity pressure, further undermining counterparties and their potential eligibility."
Additional enhancements to the criteria include a shortening of the period in which remedial actions are expected to be taken where collateralisation is possible and an increased focus on excessive counterparty dependency. Collateralisation expectations have also been increased as a counterparty's credit profile deteriorates and, separately, for derivative positions that are deemed to be less liquid.
"While Fitch maintains its opinion that the structural mechanisms such as minimum rating thresholds included in transaction documentation are usually sufficient to support the highest investment-grade ratings, Fitch believes that certain counterparty exposures are so large that they cannot be simply addressed by such mechanisms alone," says Andreas Wilgen, Senior Director in Fitch's European Structured Finance team. "In such cases, ratings above those of the counterparty may not be possible."
Fitch will apply the principles of its updated criteria in assigning both new ratings and maintaining existing ratings as part of the surveillance process. For an existing transaction, where a counterparty fails to satisfy all aspects of the criteria, the ultimate impact on the ratings will depend on any transaction-specific structural mechanisms, the materiality of the counterparty exposure to the transaction, the materiality of their criteria non-compliance and the transaction's performance. The agency will therefore not automatically take rating action on a transaction where a counterparty no longer satisfies the provisions of its criteria - the specific circumstances of each transaction will always be considered.
For the large majority of transactions Fitch does not expect rating implications arising from the update to the counterparty criteria. Some existing transactions may fall within the classification of excessive counterparty risk and will be reviewed as part of the ongoing review process. If identified as being exposed, such transactions will be formally placed on RWN, which will be resolved pending structural changes potentially affecting the rating analysis.
The two criteria reports, 'Counterparty Criteria for Structured Finance Transactions' and 'Counterparty Criteria for Structured Finance Transactions: Derivative Addendum', and the corresponding feedback report explaining Fitch's response to market feedback during the exposure period, "Feedback Analysis: Counterparty Criteria for Structured Finance Transactions", are available at www.fitchratings.com.
Fitch will host a conference to present the final criteria on 27 October 2009 in London. Further details will follow in a separate announcement.
Contact: Stuart Jennings, London, +44 20 7417 6271; Andreas Wilgen, +44 20 7417 6332; Glenn Costello, New York, +1 212 908 0307; Ben McCarthy, Sydney, +61 2 8256 0388.
Media Relations: Julian Dennison, London, Tel: +44 020 7682 7480, Email: julian.dennison@fitchratings.com; Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com; Shivani Sundralingam, Singapore, Tel: + 65 6796 7215, Email: shivani.sundralingam@fitchratings.com.
Additional information is available on www.fitchratings.com.
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