Moody's Guidelines May Affect 200 Structured Transactions

by: Research Recap

Moody’s new operational risk guidelines for global structured finance transactions could affect the senior ratings of up to 200 transactions worldwide. These transactions include around 80 RMBS, 30 ABS, 20 CMBS in Europe and 47 student loan ABS in the U.S., Moody’s said. The guidelines may also affect a limited number of structured credit transactions in Europe.

Moody’s announced today that it expects to publish its operational risk guidelines for global structured finance transactions by the end of February 2011.

“The performance of a securitisation transaction depends not only on the creditworthiness of the underlying pool of obligors, i.e. the quality of the collateral, but is also closely linked to the operational performance of various transaction parties such as the servicer, trustee and cash manager,” says Annick Poulain, a Moody’s Managing Director.

The operational risk guidelines will set out Moody’s specific considerations when analysing servicing arrangements, including back-up servicers, replacement facilitators, master servicers and third party servicers. The guidelines will also discuss the role that cash managers and calculation agents play in structured finance transactions and the importance of liquidity to cover payment shortfalls in the event a servicer disruption occurs.

The final published criteria will outline the operational risk characteristics that are commensurate with highly rated structured finance securities. For example, the US securitisation market is characterised by: (i) a history of successful servicing transfers; (ii) an abundance of available third party servicers; and (iii) trustees who are responsible for finding successor servicing or can serve as servicer of last resort. Conversely, European ABS and RMBS transactions are more vulnerable to servicer disruption risk, as the servicing market is more fragmented with less history of servicing transfers. Moreover, trustees generally do not have the responsibility of servicing or facilitating a transfer

“Moody’s expects the combination of negative rating pressure on servicers and cash managers, insufficient back-up servicer arrangements or the lack of dedicated liquidity to result in rating reviews on around 130 European securitisation transactions,” continues Ms Poulain. “However, if transaction sponsors rapidly implement structural improvements to mitigate identified operational risks, watchlisted ratings could be confirmed,” adds Ms Poulain.