Following its rating downgrade of Lehman Brothers Holdings long- and short-term
Issuer Default Ratings (IDRs) to ‘D’ on its declaration of bankruptcy, 
Fitch Ratings is reviewing Lehman Brothers Holdings and subsidiaries’ counterparty exposure in global structured finance deals.

Meanwhile, credit default swap (CDS) counterparty, eligible security and reference entity exposure will be discussed in a separate commentary to be issued shortly by the rating agency.

In addition to those actions, Fitch is evaluating ratings of various Lehman subsidiaries, the long term IDRs of which were also downgraded by Fitch. The subsidiaries include: Lehman Brothers, Lehman Brothers Holdings, Lehman Brothers International, Lehman Brothers Bank, FSB, and Lehman Brothers Commercial Bank.

Counterparty risk in SF transactions is subject to Fitch’s criteria for hedge counterparties. For SF deals rated ‘BBB+’ or higher with counterparties that are downgraded to below ‘BBB+/F2’,

Fitch expects that the actions of choice by the issuer should be to replace the counterparty or arrange for the hedge obligations to be guaranteed by a rated entity that is consistent with Fitch’s criteria. During the time a replacement or guarantor is sought, the rating agency expects collateral to be posted as a measure of protection.

The rating agency's hedge counterparty criteria offers for a 30-day cure period before a security is placed on Rating Watch Negative following a counterparty downgrade.

But, considering the severity of the downgrades to Lehman and its subsidiaries, Fitch will move more quickly to indicate which structured finance transactions are at risk of downgrade, should no replacement counterparty or guarantor assume Lehman’s hedge obligations. The rating agency will provide lists of  U.S., EMEA and Asian deals with exposure to the different Lehman entities over the next few days.

The resolution of the Rating Watch Negative status will reflect the rating of the specific counterparty, terms of the hedge contract, the likelihood of cure, and when a cure is not expected, analysis of deals cash flows without benefit of existing hedges, the rating agency said.

In a related report, Fitch Ratings this morning said that it is currently assessing the potential ratings impact of the bankruptcy of Lehman Brothers Holdings on synthetic CDOs that it rates.

Following Lehman's bankruptcy declaration on Sept. 15, Fitch downgraded the Issuer Default Rating (IDR) and debt ratings of Lehman and its parent of Lehman Brothers, along with other subsidiaries.

These downgrades are expected to adversely impact the ratings of synthetic CDOs whose credit quality is linked in some way to that of Lehman-related entities, the agency said.


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