Generally positive rating impact on structured finance transactions
New York, March 16, 2015 -- Moody's Investors Service has updated several cross-sector,
primary and secondary rating methodologies for structured finance securities,
to incorporate a new counterparty risk (CR) Assessment that it has introduced
for banks as part of its revised bank rating methodology (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_179038).
The updates to the structured finance rating methodologies will generally
have a positive rating impact on structured finance transactions.
In the coming days, Moody's will issue separate announcements
that will provide details on these implications. Moody's
expects to conclude the majority of the structured finance rating reviews
in the first half of 2015. The timeline to resolve these reviews
will depend on the resolution process applied to the underlying bank ratings,
as well as the assignment of CR Assessments.
The CR Assessment reflects an issuer's ability to avoid defaulting
on certain senior operating bank obligations and other contractual commitments,
but it is not a rating. The CR Assessment takes into account the
issuer's standalone strength as well as the likelihood of affiliate
and government support in the event of need, reflecting the anticipated
seniority of counterparty obligations in the liabilities hierarchy.
The CR Assessment also takes into account other steps authorities can
take to preserve the key operations of a bank in a resolution.
Obligations and commitments that CR Assessments typically take into account
include payment obligations associated with covered bonds (and certain
other secured transactions), derivatives, letters of credit,
third party guarantees, servicing and trustee obligations and other
similar operational obligations that arise from a bank in performing its
essential customer-serving operating functions.
The revised methodologies implement the proposals outlined in Moody's
Request for Comment "Updates to Structured Finance Rating Methodologies
Resulting from New Counterparty Risk Measure," published on
8 January 2015 (http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF392314).
A full list of the updated structured finance credit rating methodologies
is available at the end of this press release.
CR ASSESSMENTS WILL BE ASSIGNED OVER TIME AND APPROXIMATED VALUES DEPEND
ON THE JURISDICTION
Although Moody's will assign the CR Assessments to banks over time,
the rating agency will immediately start using approximations for CR Assessments
as inputs into its credit analysis for structured finance transactions.
The approximate values will be used up to the point when Moody's
assigns a CR Assessment. CR Assessments will be expressed on alpha-numeric
scales that correspond to the alpha-numeric ratings of the global
long-term and short-term rating scales, with a "(cr)"
modifier appended to the CR Assessment symbols.
Moody's uses internal guidance on the CR Assessments to assess the
rating impact on outstanding structured finance transactions. The
internal guidance is in line with the guidance published in its updated
bank rating methodology and it its responses to frequently asked bank
methodology related questions.
More specifically, the position of the CR Assessment relative to
rated instruments will depend on a bank's jurisdiction.
- In the European Union, Norway and Liechtenstein,
the CR Assessment will generally be at least as high as the deposit rating.
- In Switzerland, the CR Assessment will generally be at
least as high as the senior unsecured debt rating.
- For US banks subject to Title I under the Dodd-Frank Act,
the CR Assessment will generally be one notch higher than the baseline
credit assessment (BCA).
- For US banks subject to Title II under the Dodd-Frank
Act, the CR Assessment will generally be at least as high as the
senior unsecured debt rating.
- Outside operational resolution regimes, the CR Assessment
will generally be no lower than the bank deposit rating.
In all cases, the CR Assessment will be subject to a cap of the
lower of the local currency deposit ceiling, or the local government
bond rating plus one notch, or plus two notches where the adjusted
BCA itself already above the government bond rating.
Where relevant, the approximate CR Assessment values used in structured
finance credit analysis will factor in guidance on expected changes to
the BCA, senior unsecured debt and bank deposit ratings.
KEY UPDATES TO THE CROSS SECTOR RATING METHODOLOGIES
Moody's has updated several of its cross sector methodologies to
explain how it uses CR Assessments in its analysis of structured finance
transactions. For example, it now uses CR Assessments to
measure the risk of default for (1) operational risk exposures (including
exposures to servicers, cash managers and trustees); (2) exposures
to swap counterparties; and (3) exposures to servicers in relation
to commingling risk. If a bank does not have a CR Assessment --
either because it has not yet been assigned or is not expected to be assigned
-- Moody's uses the approximated CR Assessment or
an alternative proxy, which it may derive from other rating reference
Moody's has also clarified that it uses alternative reference points
to measure the default risk for certain other exposures. For example,
its methodology on the temporary use of cash now distinguishes between
the use of senior unsecured debt ratings for eligible investments,
and deposit ratings for bank deposits. Similarly, Moody's
methodologies for assessing set-off risk in Europe, the Middle
East and Africa (EMEA) and Australia, now reference a country's
local country risk ceiling to measure the default risk associated with
its deposit guarantee scheme.
For bank-related exposures, e.g. deposits held
at a defaulting bank, Moody's now assumes a recovery rate
of 45% in the instances when the risk is measured or modelled.
TREATMENT OF TRIGGERS IN STRUCTURED FINANCE TRANSACTIONS
The updated structured finance methodologies provide that Moody's
gives equal value to triggers that are inserted by issuers and reference
either senior unsecured debt ratings and/or CR Assessments. For
example, if a counterparty has a CR Assessment of A2(cr) and a transfer
trigger is set at a loss of the A3, the trigger contributes an uplift
of two notches (resulting in a probability of becoming unhedged equivalent
to a Aa3-rated entity, assuming no other uplift), regardless
of whether the trigger in the transaction documentation references the
counterparty's senior unsecured debt rating or CR Assessment.
In the event that a bank breaches a transaction trigger referencing its
senior unsecured rating then, in keeping with the usual practice,
Moody's will monitor how the bank responds. If the bank promptly
takes the relevant remedial action -- such as transferring its obligations
to another bank -- or some other suitable action that preserves the
value of the trigger, the rating of the notes will generally not
be negatively affected by the trigger breach (although any simultaneous
downgrade of the bank's CR Assessment or deposit rating may affect
the rating of the notes). By way of example, the value of
a transaction trigger referencing a senior unsecured rating will be preserved
if the transaction parties amend the documentation to replace it with
a CR Assessment trigger (if it relates to a swap), or a bank deposit
rating trigger (if it relates to a bank account) at the same rating level.
If, promptly following a senior unsecured trigger breach,
the bank confirms its intention to take satisfactory action, and
then takes that action within a reasonable period of time (typically no
more than 90 days from the trigger breach), the breach will not,
of itself, affect the rating of the notes.
KEY UPDATES TO THE ASSET-BACKED COMMERCIAL PAPER (ABCP) RATING
In line with this methodology update, Moody's will use the
new CR Assessment or the senior unsecured debt rating as a reference point
to, among other things, determine the exposure to liquidity
and support providers, depending on the purpose of the ABCP conduit.
Part of the analysis when assigning a rating to ABCP conduits is to determine
the appropriate reference point (CR Assessment or senior unsecured debt
rating or equivalent) that accurately addresses the risk of the conduit.
If the primary activity of the ABCP conduit is to directly fund on a revolving
basis commercial clients of a bank, whose activities might be sustained
in a resolution of the bank, Moody's generally considers the
CR Assessment to be an appropriate reference point.
If the primary activity of the ABCP conduit is to fund securities or other
assets transferred to it by a bank, which is generally the sponsor,
Moody's will assess whether the motive and function of the programme
are consistent with the bank's own funding activities and will generally
consider a senior unsecured rating to be an appropriate reference point.
If a liquidity provider is not assigned a CR Assessment, Moody's
will use the best proxy, which may be derived from the bank's
senior unsecured debt rating.
UPDATES TO THE CREDIT CARD RATING METHODOLOGY
In line with its updated Credit Card rating methodology, Moody's
will now generally use the sponsor's CR Assessment as a proxy for
the likelihood of the closure of its credit card business. The
CR Assessment most accurately reflects the scenario under which a successfully
resolved bank will continue its core activities such as the origination
of credit card receivables.
If the credit card business is not considered a core activity of the sponsor,
or if there are other risks associated with the viability of this specific
business in the event of bank failure, Moody's could apply
a lower reference point to assess the wind-down of the portfolio.
If the sponsor is not eligible for a CR Assessment or one is not available,
Moody's will use the best alternative proxy, which it may,
for example, derive from its senior unsecured debt rating or,
in some cases, its deposit rating. In limited circumstances
a sponsor could qualify for a low-volatility credit estimate in
the absence of a rating or CR Assessment.
In the interim period between the release of the updated methodology and
the conclusion of the bank-related rating actions or the assignment
of a CR Assessment, Moody's might be asked to rate new notes
out of a credit card trust that it already rates. If its outstanding
notes' ratings are on review for upgrade prompted by the methodology
update or changes to Moody's assumptions, similarly-structured
notes issued under new series will likely be assigned ratings on review
for upgrade as well. The determination of Moody's "Aaa
Credit Enhancement" would be approximated in the same manner.
UPDATES TO THE FUTURE RECEIVABLES RATING METHODOLOGY
In future flow transactions, where the originator is a bank,
Moody's will generally use the bank's CR Assessment rather
than the bank's local currency ratings to measure the probability
that it will no longer be able to generate future receivables.
Credit risk related to the bank's local currency senior unsecured
debt rating could still exist, depending on (1) the structure of
the transaction, (2) the legal analysis of the true sale or transfer
of security interest, and (3) Moody's analysis of the originator
and its market.
UPDATES TO OTHER MOODY'S DOCUMENTS AND METHODOLOGIES
Today, Moody's also published an update to its Rating Symbols
and Definitions guide, which now offers a definition of the CR Assessment
under the section "Input to Ratings Services" (http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_79004)
and a frequently asked questions document that sets out the relative positioning
of the CR Assessment vis-à-vis other bank credit
Additionally, Moody's announced today updates to its covered
bond rating methodology, Spanish multi-issuer covered bonds
methodology and republished its credit substitution approach.
- Moody's Approach to Rating Covered Bonds: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF396210
- Moody's Approach to Rating Spanish Multi-Issuer
Covered Bonds: http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF396797
- Rating Transactions Based on the Credit Substitution Approach:
Letter of Credit-backed, Insured and Guaranteed Debts:
UPDATED STRUCTURED FINANCE CREDIT RATING METHODOLOGIES
- Moody's Approach to Rating Credit Card Receivables-Backed
Securities (replacing the September 2014 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF396330
- Moody's Approach to Assessing Set-off Risk for Australian
Securitisation and Covered Bonds Transactions (replacing the July 2014
- Moody's Approach to Counterparty Instrument Ratings (replacing
the March 2014 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF397946
- Approach to Assessing Swap Counterparties in Structured Finance
Cash Flow Transactions (replacing the November 2013 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF397760
- Moody's Approach to Assessing Set-off Risk for EMEA
Securitisation and Covered Bonds Transactions (replacing the October 2013
- Global Structured Finance Operational Risk Guidelines (replacing
the June 2013 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF397096
- Moody's Approach to Rating Future Receivables Transactions
(replacing the May 2013 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF397190
- The Temporary Use of Cash in Structured Finance Transactions:
Eligible Investment and Bank Guidelines (replacing the March 2013 report):
- Moody's Approach to Rating Asset-Backed Commercial
Paper (replacing the May 2012 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF398273
- Cash Commingling Risk in EMEA ABS and RMBS Transactions:
Moody's Approach (replacing the November 2006 report): http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF398379
Moody's is implementing the updated credit rating methodologies
as of the publication date, except for jurisdictions in which the
rating agency must fulfil regulatory requirements prior to implementation.
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MD - Structured Finance
Structured Finance Group
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Moody's updates several structured finance rating methodologies in light of its new counterparty risk assessment for banks
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007