Fitch Ratings said today that it does not assign Issuer Default Ratings (IDRs) to special purpose vehicles (SPVs) used in structured finance because of their lack of standalone commercial substance.

The agency said its decision applies only to IDRs that would be assigned to the SPV itself and not to the issue ratings (IRs) that are assigned by Fitch to securities issued by SPVs, most commonly seen in the structured finance sector. IRs for securities issued by SPVs will continue to be assigned by Fitch in accordance with the relevant structured finance rating criteria.

"SPVs in structured finance generally have no commercial substance of their own - for example, they have no employees and are restricted from taking on their own liabilities,” said Stuart Jennings, risk officer at Fitch for EMEA/APAC structured finance. “As such, an SPV is basically an 'empty shell', established primarily with the intention that its assets are legally segregated and isolated from corporate risks. This isolation includes limiting risk from the SPV itself by restricting its activities."  

Jennings explained that the assessment of whether an SPV operates as intended is more of a legal matter rather than a credit one – its structure either works or it doesn't.

Since Fitch's ratings are primarily intended to address credit matters, to assign an IDR to an SPV would have limited meaning. Little or no credit analysis would be involved and, apart from the structured finance securities which have their own IRs, the SPV has no financial obligations of its own to which such a rating could apply.

Some national regulators require issuers to have credit ratings so that the securities they issue be qualifying investments for certain purposes. If the issuer is an SPV, Fitch would not be able to assign credit ratings to meet such regulatory requirements.

Fitch also emphasised that SPVs, although generally "bankruptcy remote", are not "bankruptcy proof".

"Recent court cases show that SPVs could be drawn into the bankruptcy filing of the entity or group that originated the transaction and that the security structure created around an SPV's assets may be open to challenge," said Lars Jebjerg, senior director in Fitch's structured finance risk group. "Hence, the degree of separation of the SPV and its assets from any other affiliate must be systematically reviewed in order to assess the likelihood that an SPV will fulfill its purpose in a structured finance transaction.”

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