News

Further ratings reviewed on margin requirements

Monday 4 September 2017 14:17 London/ 09.17 New York/ 22.17 Tokyo

Fitch has placed 38 ABS tranches on rating watch negative, due to the reduced likelihood of counterparty replacement, resulting from new two-way margin posting requirements (SCI passim). The rating agency notes that one of its key considerations is the ability to replace a counterparty following their downgrade below defined trigger levels and a key factor in achieving ratings above that of the counterparty.

The tranches placed on watch for downgrade are: Goal Capital Funding Trust 2006-1 class A4 to A6s; Nelnet Student Loan Trust 2006-2 class A5 and A6 notes; SLC Student Loan Trust 2008-1 A4A, A4B and B notes; SLM Student Loan Trust 2003-10 A3 and A4 notes; SLM Student Loan Trust 2003-12 A5 and A6 notes; SLM Student Loan Trust 2003-2 A5 notes; SLM Student Loan Trust 2003-5 A5 notes; SLM Student Loan Trust 2003-7 A5A and A5Bs; SLM Student Loan Trust 2004-10 A5A, A6A, A7A, A7B, A8 notes; SLM Student Loan Trust 2004-2 A5 and A6 notes; SLM Student Loan Trust 2004-5 A5 and A6 notes; SLM Student Loan Trust 2005-9 A6, A7A and A7B notes; SLM Student Loan Trust 2006-10 A5A, A5B and A6 notes; SLM Student Loan Trust 2006-4 A5 and A6 notes; and SLM Student Loan Trust 2007-4 A4A, A4B and A5 notes.

Fitch comments that the tranches on negative rating watch are exposed to currency swaps and, following the two-way margin posting requirement on US SPVs, there is a decreased likelihood of counterparty replacement. As such, any novation or change in the hedging contracts would likely "stop the grandfathering of the swap" - which would mean the transaction would not be able to fulfil certain margin requirements in its current form. The transaction would then be prevented from finding a replacement counterparty, which will require the transaction to be able to post margin.

Transactions with currency hedging are seen as highly dependent on the swap counterparty because the loss of hedging could greatly increase the default risk of the hedged tranche. Fitch adds that it views unhedged tranches rated higher than the counterparty as facing a higher risk, largely due to the current legal uncertainty on the enforceability of flip clauses in the US and the potentially large size of termination payment for currency swaps that could become senior payables in the priority of payments.

Fitch says that it is not taking any action on transactions with basis swaps, due to its view that the risk stemming from these hedges is limited. The agency adds that it is in the process of reviewing the risk for tranches with fixed- and floating-rate swaps.

Moody's is also reviewing the ratings of a number of US auto loan and FFELP student loan ABS tranches, after updating its counterparty risk methodology in response to the emergence of swap margining requirements (SCI 27 July).

04/09/2017 14:17:11