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Global Credit Research -
17 Feb 2012
Other credit issues add to negative pressure on structured finance ratings
London, 17 February 2012 -- Moody's Investors Service has today lowered the highest achievable
structured finance rating in (i) Italy, to Aa2(sf) from Aaa(sf);
(ii) Portugal, to Baa1(sf) from A2(sf); and (iii) Spain,
to Aa2(sf) from Aaa(sf). The lowering of these highest achievable
structured finance ratings was prompted by the downgrade of the ratings
of those sovereigns on 13 February 2012 (please see "Moody's adjusts
ratings of 9 European sovereigns to capture downside risks" for
more information).
POTENTIAL SCOPE AND LIKELY IMPACT: ALL AFFECTED STRUCTURED FINANCE
TRANSACTIONS WILL BE REVIEWED
Moody's decision to lower the highest achievable structured finance
rating will likely impact all outstanding (i) Italian and Spanish structured
finance tranches currently rated above Aa2(sf); and (ii) Portuguese
tranches currently rated above Baa1(sf), except in very limited
circumstances. The rating agency will announce information on the
specific transactions impacted as soon as practicable.
HIGHEST ACHIEVABLE STRUCTURED FINANCE RATINGS CHANGED
The highest achievable structured finance ratings (i) are set at or below
the relevant country ceiling except in very limited circumstances;
and (ii) will generally not exceed the sovereign bond rating by more than
a limited number of notches.
The highest structured finance rating achievable is the rating beyond
which structural features or credit enhancement provided by any domestic
party cannot mitigate the impact of severe events and the level of uncertainty
surrounding such events. The changes that have been announced reflect
an increase in the probability of severe economic stress or even default,
which, although in most cases extremely low, create a level
of uncertainty that is inconsistent with structured finance rating levels
higher than the new levels that have been set. The highest achievable
structured finance rating may be revised further downwards if the likelihood
of those events were to increase.
A simultaneous decline in a government's fiscal position and in
the strength of its banking system can contribute to (i) a significant
deterioration in asset performance; (ii) increased market value risk;
(iii) reduced financing availability; and (iv) a decrease in the
number of viable transaction counterparties in structured finance transactions.
Currently, the highest structured finance rating that Moody's
expects to be achievable is B1(sf) in Greece, A1(sf) in Ireland,
Aa2(sf) in Italy, Baa1(sf) in Portugal, and Aa2(sf) in Spain,
whilst the respective sovereign ratings are Ca, Ba1, A3,
Ba3 and A3. In other European Union (EU) countries, Aaa(sf)
is, in principle, presently achievable. Although some
exceptions may be found, the highest achievable rating for covered
bond programmes is generally Aa2 in Italy, Baa1 in Portugal and
Aa2 in Spain, regardless of any higher level presented by the Timely
Payment Indicator cap.
MINIMUM CREDIT ENHANCEMENT LEVELS MAY BE REDUCED
In several countries that are subject to unusual and rapidly evolving
financial and economic stress, Moody's has established minimum
levels of credit enhancement, which, together with a robust
structure, are needed to qualify for the highest structured finance
rating achievable in those countries. In light of the new highest
achievable structured finance ratings, Moody's is currently
reviewing the commensurate minimum credit enhancement levels necessary
to achieve the new lower ratings and will make an announcement in due
course.
Moody's bases minimum credit enhancement levels on a determination of
how severely asset performance might deteriorate during a severe event,
factoring in (i) likely volatility of performance; (ii) projected
recoveries for the asset type during a future period of stress; (iii)
the rating of the sovereign; and (iv) the transaction ratings.
Given the significant challenges faced by the governments of Italy,
Portugal and Spain, and the weak macroeconomic outlook in those
regions, the debt-repayment capacity of consumers and small
and medium enterprises (SMEs) will become increasingly strained.
Losses from additional risks such as set-off, commingling
or other deal specific factors will need to be considered over and above
these minimum levels.
Moody's discusses the relationship between sovereign and structured
finance ratings in its rating implementation guidance "How Sovereign
Credit Quality May Affect Other Ratings," published February
2012 and its special report "Assessing the Impact of the Eurozone
Sovereign Debt Crisis on Structured Finance Transactions,"
published in April 2011.
How Sovereign Credit Quality May Affect Other Ratings
http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_139495
OTHER DEVELOPMENTS NEGATIVELY AFFECTING EUROPEAN STRUCTURED FINANCE TRANSACTIONS
IN THE NEAR FUTURE DESCRIBED
Moody's has identified several other developments that could exert
negative pressure on European structured finance ratings in the near future.
On 15 February 2012, Moody's placed on review for downgrade
the ratings of multiple European and Global banks, and Securities
Firms with Global Capital Markets Operations (please see "Moody's
Reviews Ratings for European Banks" and "Moody's Reviews Ratings
for Banks and Securities Firms with Global Capital Markets Operations"
for more information). The creditworthiness and therefore the ability
of entities eligible to act as transaction parties may decline following
the conclusion of the rating agency's review. Depending upon
the magnitude of any downgrade of the relevant transaction counterparties
(such as servicers, cash managers, liquidity banks,
account banks or swap counterparties), the effect on the related
structured finance transactions could be significant. Any deterioration
in the credit quality of transaction parties may also lead to increased
risks of set-off and commingling in some transactions.
Furthermore, as discussed in Moody's special report "Rating
Euro Area Governments Through Extraordinary Times -- An Updated Summary,"
published in October 2011, the rating agency is reassessing the
euro area's single 'country ceiling,' which currently
implies that the debt of any euro area entity, regardless of its
country of domicile, could potentially achieve a Aaa rating (unless
it is subject to the highest achievable ratings as described above or
other ratings ceilings imposed for analytical reasons). Moody's
will consider reintroducing individual country ceilings for some or all
euro area members, which could affect further the maximum structured
finance rating achievable in those countries.
Moody's is also continuing to consider the impact of the deterioration
of sovereigns' financial condition and the resultant asset portfolio
deterioration on mezzanine and junior tranches of structured finance transactions.
ALL AFFECTED EUROPEAN STRUCTURED FINANCE TRANSACTIONS WILL BE REVIEWED
Moody's will review all ratings of affected structured finance transactions
and announce any rating actions in the coming weeks, in the following
order:
* Structured finance ratings that are pass-through to the recently
downgraded sovereign's ratings or the ratings of affected banks
* Structured finance ratings that are directly linked to the banks'
ratings that are affected by rating actions
* Structured finance ratings in Italy, Portugal and Spain,
including those tranches rated below the highest achievable structured
finance rating
* In the event of transaction counterparty downgrades, structured
finance transactions that are indirectly exposed to the credit quality
of counterparties performing operational roles or providing financial
support
Moody's will continue to approach its credit analyses of structured
finance transactions on a case-by-case basis for each country
that comes under stress. While conditions that weaken the sovereign,
the economy and banking sector can be similar, the consequences
for structured finance transactions are never identical.
Henry Charpentier
MD - Structured Finance
Structured Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Katherine Frey
MD - EMEA Structured Fin
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's lowers the highest achievable structured finance ratings in Italy, Portugal and Spain following the recent sovereign rating actions
No Related Data.
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