Fitch Ratings said that the recently proposed amendments to include a credit support annex (CSA) for six Harbourmaster CLO transactions are a positive structural feature as they reduce counterparty risk within the deals.
The affected offerings include Harbourmaster CLO 6 B.V., Harbourmaster CLO 7 B.V., Harbourmaster CLO 8 B.V., Harbourmaster CLO 9 B.V., Harbourmaster Pro-Rata CLO 2 B.V., Harbourmaster Pro-Rata CLO 3 B.V.
For each Harbourmaster transaction listed above, non-euro denominated assets might be purchased provided that these assets are asset-swapped with an foreign exchange hedging counterparty that meets the counterparty rating requirements outlined in the transaction documents.
Asset swaps simultaneously help mitigate foreing exchange risk and basis mismatch between the non-euro denominated assets and the liabilities. The default of the foreign exchange hedge counterparty would terminate the asset swaps and leave the transaction exposed to foreign exchange rate and index fluctuations which may result in reduced cash flows to the notes.
"The inclusion of the CSA allows these counterparties to post collateral should its rating fall below a predefined first or second rating trigger," Fitch said. "The CSA also outlines the type of collateral used as eligible credit support and applicable valuation percentages for the collateral. Independent third-party verification of both mark-to-market calculations and the correct and timely posting of collateral are introduced if the counterparty chooses to post collateral after downgrade below the second rating trigger."
Fitch said that previously, the only available remedies were for the counterparty to replace itself or find a guarantor that meets the counterparty rating requirements within 30 calendar days. With the CSA, if the counterparty wishes to find a replacement or guarantor upon falling through the second rating trigger, the posting of collateral provides additional security while allowing the counterparty time to pursue a replacement or guarantor that meets the counterparty rating requirements as defined in the transaction documents. Additionally, the transaction will continue to benefit from the asset swaps, foreign exchange options or interest rate caps in place while the counterparty pursues remedies after falling below the second rating trigger.