This content is from: Local Insights

Securitisations and downgrading of swap counterparties

A rating is, in substance, the opinion expressed by a rating agency as to the ability of an entity to generate the funds necessary to meet the commitments undertaken with respect to its creditors. It is based mainly on an economic assessment, although in certain circumstances the economic assessments must go parallel with contractual structures.

Market turbulences and downgradings of primary players may generate very severe consequences on securitisation transactions.

Securitisation transactions have been traditionally structured so as to contemplate that the downgrading of certain players involved in the transaction below rating triggers require predefined remedies such as the creation of a collateral or the addition of a guarantor.

The recourse to collateral is becoming quite frequent to support the downgrading of swap counterparties and consequently the correct identification of the collateral offered is a sensitive issue. Attention must be given to the currency of the collateral, the maturity and consequently the yield of the securities and their ratings.

No exchange risk should be introduced through the inclusion of securities denominated in a currency different from that of the underlying securitisation so as to avoid any exposure to new risks. Similarly, the selection of securities should be made carefully in order to make sure that the rating of the securities posted is consistent with the original rating of the swap counterparty when the transaction was structured.

The posting of securities with lower ratings on the assumption that the rating of the securitised notes has been reduced through the years is not the best option as it clearly generates contagious unjustified effects on the rating of the notes.

The introduction of a collateral should not alter the original positioning of secured creditors and the occurrence of a termination event or an event of default of the swap counterparty should cause the collateral to become part of the issuer's available funds.

Susanna Beltramo

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