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Global Credit Research - 18 Aug 2010
New York, August 18, 2010 -- Moody's Investors Service has determined that Channel Capital Plc's
("Channel") proposed amendments to its Operating Guidelines,
Capital Model Technical Document, Administration Agreement,
and Capital Model code ("Amendments") will not in and of themselves
at this time cause its counterparty and debt ratings to be reduced or
withdrawn. Moody's does not express an opinion as to whether the
Amendments could have non-credit-related effects.
The Amendments primarily change (1) Channel's Ratings Tests described
below, (2) its Administration Agreement to reflect a transfer of
some services from QSR Management Limited to Mourant & Co.
Limited, and (3) investment guideline restrictions in Channel's
Channel is a credit derivative product company ("CDPC"), which is
a type of a structured finance operating company. It is incorporated
in Ireland as a public company with limited liability under the Companies
Act 1963-2005 of Ireland. Channel is permitted to invest
in a diversified portfolio of eligible corporate credits and sovereigns
using bespoke tranched synthetics and single name credit default swaps
The Rating Tests, that are subject of the Amendments, are
structural features of Channel designed to limit certain actions,
such as trades with counterparties and certain payments to its various
stakeholders, by making such actions subject to passing the Rating
Tests. The Rating Tests also determine Channel's Operating
Mode (Normal, Suspension, or Wind-Down). Passing
or failing the Rating Tests is determined by using Channel's Capital
Model to calculate the expected losses for all its obligations ("Expected
Loss") and then comparing Expected Loss to Expected Loss limits.
Changes to the Rating Tests include updating Channel's modeling
assumptions to match those of Moody's CDOROM™ version 2.6
and raising Expected Loss limits. CDOROM™ version 2.6
has been in use since May 27, 2010. The principal changes
from CDOROM™ version 2.4, which was previously used
as a basis for Channel's Capital Model, are revised and updated
key assumptions for default probability and correlation, which were
described in detail in the press release entitled "Moody's updates key
assumptions for rating corporate synthetic CDOs." The Amendments
change assumptions about risk in Channel's Capital Model to better
match those of Moody's CDOROM™ version 2.6 and other
models that Moody's uses to estimate Expected Loss. Also,
the Amendments change the Expected Loss limits for its Counterparty Rating
Expected Loss Test and Debt Rating Test (for Aaa-rated debt only)
to a level consistent with a midpoint between Moody's Aaa and Aa1
idealized expected loss levels.
Moody's believes the effect of the changes to Channel's Ratings
Tests will not cause a negative rating action. The changes to Channel's
modeling assumptions will result in larger Expected Loss estimates,
which makes failing the Rating Tests more likely, compared to estimates
under previous assumptions. However, raising Expected Loss
limits makes failing the Rating Tests less likely, all else being
equal. Sample testing showed that, depending on the particular
circumstance, the net effect of the changes is that either they
will have no effect or make the Rating Tests more likely to fail,
which would then limit Channel's ability to add risk through trades
or reduce its capital, such as through debt redemptions or Excess
Spread Payments. Moreover, model changes are more likely
to result in Expected Loss estimates being in line with Moody's
estimates, which are key metrics for Moody's ratings.
Notwithstanding the net effects, changing the Expected Loss Limits
to the proposed levels would not cause a negative rating action by itself
because overall capital adequacy and risk exposure of the existing portfolio
remains consistent with the current ratings.
In addition, the Amendments modify Channel's Administration
Agreement, including a form of fee letter, with QSR Management
Limited. The changes reflect a transfer of some services to alternative
administrator Mourant & Co. Limited,. Future changes
to fees under that particular form of fee letter are subject to Channel's
Rating Tests. Moody's does not believe there are any credit
effects from the change in services, apart from the fee payable
to Mourant for its service, which is subject to Channel's
Finally, the Amendments change Channel's self-imposed
investment guideline restrictions in its Operating Guidelines.
Channel is now precluded from selling protection on tranches that have
a Moody's Metric based on CDOROM™ version 2.6 runs performed
by the manager corresponding to below Aa3 (changed from Aaa). The
restrictions are not a part of Moody's ratings analysis, which
instead relies on restrictions imposed through Channel's Ratings
The principal methodology used in rating Channel was Moody's "Credit Derivative
Product Companies" published in March 2006, which is available on
www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Further information on Moody's analysis of this transaction is available
on www.moodys.com. In addition, Moody's publishes
a weekly summary of structured finance credit, ratings and methodologies,
available to all registered users of our website, at www.moodys.com/SFQuickCheck.
Moody's will continue monitoring the ratings. Any change in the
ratings will be publicly disseminated by Moody's through appropriate media.
Senior Vice President
Structured Finance Group
Moody's Investors Service
Senior Vice President
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's: Channel Capital Plc's ratings unaffected by proposed amendments to operating documents
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