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Rating Action:

MOODY'S ASSIGNS PRIME-1 RATING TO GRAMPIAN, A NEW ABCP PROGRAMME SPONSORED BY HBOS TREASURY SERVICES PLC

16 Jul 2002
MOODY'S ASSIGNS PRIME-1 RATING TO GRAMPIAN, A NEW ABCP PROGRAMME SPONSORED BY HBOS TREASURY SERVICES PLC

Approximately $6.0 Billion of Debt Securities Affected.

London, 16 July 2002 -- Moody's Investors Service has assigned a Prime-1 rating to the asset-backed commercial paper (ABCP) issued by Grampian Funding Limited under a newly established, partially supported, multiseller ABCP program sponsored by HBOS Treasury Services plc. Grampian will use the proceeds from the sale of ABCP to invest in a portfolio of highly-rated asset-backed securities subject to a set of predetermined investment guidelines which specify credit quality and concentration restrictions.

HBOS TREASURY'S SECOND CREDIT ARBITRAGE VEHICLE: Grampian is the second credit arbitrage conduit to be sponsored by HBOS Treasury Services. Its other conduit, Pennine, was established in September 2000 and currently has outstanding CP of approximately $11 billion. Indeed, Pennine has been one of the fastest growing conduits in the European ABCP marketplace. The authorised issuance amount for Grampian is $6 billion. Grampian will issue both USCP and ECP.

MOODYS EXPECTS MODERATE GROWTH OF CREDIT ARBITRAGE VEHICLES IN THE SHORT TERM: As of March 2002, asset backed securities accounted for 41% of the total assets purchased by European conduits. The primary business reasons for the use or credit arbitrage vehicles are: (i) to take advantage of the higher yield typically paid on asset backed securities as compared with the yield on commercial paper and (ii) to obtain regulatory off-balance sheet treatment for the sponsoring bank. Moodys expects the introduction of conduits used exclusively for credit arbitrage to grow in Europe, but not as dramatically as has been seen in the US. More commonly in the European market, new conduits will purchase portfolios of highly rated ABS as a means of achieving a critical issuance volume of ABCP. After the introduction of the proposed changes to the Basle accord (estimated for early 2007) and the resultant possible reduced capital charge on highly rated assets and increased capital charge on liquidity, it is possible that the economics of credit arbitrage vehicles could be rendered less attractive and SIV vehicles may therefore be viewed as a preferred alternative for some sponsors.

RISK OF RATINGS MIGRATION: The main risk of credit arbitrage vehicles is the migration of the rating on an ABS security from the time of purchase to the point when liquidity banks will not provide funds for the asset (which is generally when it is downgraded to Caa1 or below) during the time when ABCP may be issued. This risk is addressed for Grampian by (i) dynamic credit enhancement, sized according to the credit quality of the portfolio and (ii) a prohibition on the issuance of CP if the conduit does not have the required enhancement or is otherwise out of compliance with its investment policy. Based on its proposed asset portfolio, Grampian's required enhancement will be $60 million. However, it will actually have enhancement of $180 million. To the extent that the actual enhancement exceeds the required enhancemnt, Grampian can be considered to be over-enhanced, which is a strong feature of the programme.

RATING OPINION: According to Moodys' AVP Edward Manchester, "The Prime-1 rating of Pennine is primarily based on:

· The high credit quality of the bonds purchased, and the requirement that the portfolio meets certain predetermined guidelines regarding rating, obligor and country concentrations; and

· The requirement to increase credit enhancement if the rating on the bonds is downgraded below a certain level;" In addition, the rating is based on:

· Liquidity facilities in the amount of 100% of ABCP provided by Prime-1 rated Halifax plc

· Satisfactory hedging arrangements to address currency and interest rate mismatches'

· Adequate coverage of expenses

· Certain structural protections against the bankruptcy of Grampian

· The abilities of HBOS Treasury Services plc, or its related companies, in their roles as administrator, investment advisor, liquidity agent, hedging agent and dealer.

CREDIT ENHANCEMENT: Unlike its sister conduit, Pennine (which presently has no credit enhancement), Grampian has credit enhancement of $180 million from inception. This is because, whereas Pennine can only purchase securities rated at least Aa3, Grampian may purchase ABS securities rated as low as A2. To the extent that it holds more than a limited number of Aa3 securities or any securities rated below Aa3, Grampian is required to have an amount of credit enhancement calculated in accordance with Moody's Credit Enhancement Matrix.

INVESTMENT POLICY: HBOS Treasury Services plc, in its role as investment advisor, will identify and offer only high credit quality asset backed securities which meet clearly defined investment guidelines. Each asset must be rated by Moody's.

LIQUIDITY: On any day that ABCP matures, liquidity banks (initially only Halifax plc) are required to provide funds in the amount of non-defaulted assets. An asset is considered defaulted when it is rated Caa1 or below.

ADMINISTRATOR: Like Pennine, Grampian will be administered by investment managers within HBOS Treasury Services. Moody's has reviewed HBOS Treasury Services' procedures and systems, and believes it possesses the expertise necessary to manage Grampian.

A detailed description of this and other credit arbitrage programs may be found in MOODY'S ASSET BACKED COMMERCIAL PAPER REVIEW, published quarterly. Grampian's volume will be reported in Moody's European ABCP Market Summary, published monthly and its portfolio composition and support providers will be detailed in Moody's ABCP Performance Overview, also published monthly.

Moodys expects to release a Special Comment on credit arbitrage vehicles shortly.

London
Frederic Drevon
Managing Director
Structured Finance Group
Moody's Investors Service Ltd.
44 20 7772 5454

London
Edward Manchester
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Ltd.
44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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