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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
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
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
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
· 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
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
Structured Finance Group
Moody's Investors Service Ltd.
44 20 7772 5454
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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