Agency removes vehicle from Rating Watch Negative; investors pleased with constructive outcome
A mere 20 days after Fitch Ratings took the somewhat controversial action of placing the long-term and short-term ratings of Gordian Knot's structured investment vehicle, Sigma Finance Inc., on Rating Watch Negative (see ASR 2/18/02 p. 1), the rating agency reversed course, removing the SIV from Rating Watch last Wednesday and affirming its AAA' and F1+' senior debt ratings.
Fitch's latest action, which followed after three weeks of active discussions between the rating agency and the SIV's manager, London-based Gordian Knot, is being received by the majority of the SIV market as a constructive, positive conclusion to what many players considered to be a rather peculiar ordeal.
"We had productive meetings with Fitch, and we continue to work with them, and have worked with them on Sigma for the past 14 years," said Nicholas Sossidis, a co-founder of Gordian Knot, last week. "We had a number of meetings with them in New York during the week of February 25 and got them comfortable with the state of Sigma today, as well as with how we are planning to move forward with Sigma, whether that involves changes to its structure or not."
The timing of Fitch's original watch-listing action, which took place of Feb. 14, perplexed market participants, especially since the agency had been in talks with Gordian for over a year regarding proposed changes to the SIV's structure. Moreover, no changes could be made to Sigma without the approval of all three rating agencies anyway, so the somewhat premature rating-watch action raised eyebrows.
Fitch had expressed concerns about Sigma's existing size, growth and degree of market liquidity, as well as Gordian's proposed re-tooling of the SIV's capital methodology that the manager planned to implement sometime this year. In the original press release announcing the Rating Watch Negative action, Fitch maintained that the re-worked operating structure would be "inconsistent with the existing [AAA] ratings" and "[does] not appear to strengthen debtholder protection."
Clearly, however, in a short period of time, Gordian Knot has made Fitch comfortable with both the existing state of Sigma Finance, as well as with structural alternatives that could potentially afford the SIV more flexibility. "A more flexible structure that might ameliorate this [price] risk and still provide creditor protection could be possible," Fitch wrote in last Wednesday's press release announcing the affirmation of the AAA' ratings.
This turnaround in the rating agency's stance is largely due to several significant changes that Gordian Knot agreed to over the last few weeks, Fitch says. "We had some concerns related to the program as it's currently constituted, such as its size and degree of market liquidity, and Gordian has been responsive to those concerns," said Fitch's Roger Merritt. "Whatever changes they contemplate to [Sigma Finance] will look substantially different than the proposal which they were intent on pursuing originally. We expect them to incorporate some of the concerns that we raised, including some changes in how they operate."
Chief among these changes is Gordian's promise to provide greater transparency to investors regarding operating developments and portfolio composition and movement. "We plan to expand and speed up the information given to investors on our monthly report, providing a more extensive breakdown of the portfolio," Gordian Knot's Sossidis said.
While Gordian provides a similar amount of information to each of the three rating agencies, it is not an equal amount, mainly because different rating agencies have different requirements, Sossidis added.
Fitch's Merritt also said that Gordian has now adequately addressed other troubling issues, including the moderation of its growth aspirations, adjusting its requirements for deleveraging and maintaining a market-value, rather than a book-value approach to its capital structure.
Overall, market sources feel that Sigma's greater transparency now has the potential to mitigate some contagion risk that could affect the SIV's market liquidity in a stressful environment. "While questions still linger as to the purpose and timing of the Rating Watch action, one clear byproduct of all this has been Sigma's improved disclosure, which investors are certainly happy about," said one SIV investor.