Moody's Investors Service has released guidelines to account for systemic risk - including institutional, structural, legal and political risk - in structured transactions.
"This methodology differentiates types of systemic risks, types of assets, and types of structures," said an analyst who worked on the subject at Moody's. "It can give benefit for an entity that has a better structure than one that doesn't and can also acknowledge different levels of off shore enhancement."
Prior to this methodology, global ratings of structured transactions have generally been capped by the local currency guidelines of the country in which the issuer or originator of the assets is located.
Among several different factors included in Moody's analysis are the risk of a change in the political regime, an inadequate system of contract law, the existence of a weak regulatory and legal system and macroeconomic instability that could lead the government to impose controls on the domestic payment system.
"If there was a deal that had a triple-A entity providing a 100% guarantee, that brings it to a triple-A rating," said the analyst. "But what if you have a 90% or 80% guarantee? It makes sense that it won't go to a triple-A, but how much less?"
Moody's created these guidelines as a response to the various inquires it has been receiving and also as a response to deals currently in the pipeline. It is intended to explain how certain transactions can now surpass the local currency rating cap.
