Eurozone structured finance deals that are fully retained by originators for use as European Central Bank (ECB) collateral face increased rating volatility, said Fitch Ratings in a report released today.
The rating agency said that the securitize-to-retain model that has dominated European issuance volumes since the financial crisis started has led to practices that can strain the current ratings on those deals.
The originator as the sole investor is now more frequently opting to restructure or amend retained deals, Fitch said, instead of respecting the terms of the original transaction documentation that are designed to ensure rating stability.
This issue has mostly been a problem for deals where the counterparties in the transaction are downgraded below the rating threshold to support 'AAAsf' ratings, which particularly affects offerings in Spain, Italy and Greece.
These originators, according to Fitch, are choosing to either restructure the transaction or implement alternative remedies to those that were originally mandated contractually, with the aim of keeping the original counterparties in the deal.
Originators that retain a transaction for such funding are motivated primarily by ensuring that the notes continue to qualify for funding with the ECB.
Retained structured finance securities, for the most part, must originally be issued at a 'AAAsf' level to qualify for ECB funding. Once issued, an existing security needs only to retain a minimum 'A-sf' rating to continue to qualify for ECB eligibility status.
"In contrast, where transactions are held by a wide investor base market discipline can be effective in maintaining the original terms," Fitch analysts said in the report. "Such actions would be less likely to be proposed or win investor approval, given a greater investor motivation to preserve the transaction's credit profile."
