The recent downgrades of banks that acted as transaction parties has resulted in the breach of several rating triggers in over 500 ABS and RMBS transactions, Moody's Investors Service said today.
Most of the trigger breaches arose in deals exposed to banks downgraded below ‘P-1.’
In a special report titled Restructuring Proposals in Response to Recent Bank Downgrades Increase Linkage to Counterpartiesm, Moody’s analysts said that they view a trigger to be significant if it lowers the linkage to a counterparty performing an important part of a given transaction.
Thus, out of the listed transactions, 358 have ratings on review that have the potential to be downgraded if remedies to increase counterparty linkage are not applied.
Specifically, the rating agency has recognized 420 RMBS and 235 ABS where one of the three most significant rating triggers – back-up servicer trigger, issuer account bank replacement, and swap first and second level trigger – have been breached following the recent bank downgrades.
For some of these offerings, Moody’s reported that issuers are already implementing the original solutions considered under the deal documents. In these instances, the downgrade of a relevant counterparty is credit neutral for the transaction since the alternative arrangement is proportionate with the existing rating.
Still, there are some other cases in which the parties have proposed amending the transaction documents to modify the rating trigger levels or the remedies upon a breach of a trigger. Analysts stated that these amendments are credit negative for outstanding transactions because they produce a higher linkage to the relevant counterparty.