In light of regulatory trends, Moody’s Investor Service said that bank-sponsored ABS can face rating downgrades in the absence of adjustments to these programs' structural features or, as an alternative, an assurance from the Federal Deposit Insurance Corp. (FDIC).
The June 1 AutoNavigator report issued by Moody’s looked at the risk posed to ABCP investors when custodian or sponsor companies enter into FDIC receivership.
The April 26 decision of the 11th Circuit Court of Appeals underscores the regulator’s statutory authority to confiscate the trust property of failed banks within its jurisdiction.
The case involves Ocala Funding, an ABCP program held by Colonial Bank. When Colonial entered into FDIC receivership in August, 2009, distressed investors faced losses and delayed payments. The court’s decision dismissed a preliminary injunction prohibiting the FDIC from selling the program’s assets. Investors later sued Bank of America (BofA) for breach of contract. BofA was Ocala’s trustee, collateral agent, custodian, and depository.
Moody's also said that the decision further highlighted concerns over the potential risk to investors hinging on the FDIC’s plan to grant Safe Harbor treatment to assets transferred to bank-sponsored securitizations.
“The proposed safe harbor contains a number of ongoing and subjective provisions that the FDIC, as receiver, could choose to evaluate at the time of a bank-sponsor’s failure,” Moody’s said.
In addition, the rating agency said that the regulator’s increased authority threatens the confidence of ABS investors and securitization in general.