Moody's Investors Service plans to release its first Transaction Governance Assessments report before the year is through.
The report represents the rating agency's opinion of the level of oversight, controls and procedures put in place to mitigate risk in a given transaction. "Investors are clearly more focused on this as a result of some of the transactions that have not performed in the market over the past several years," said Moody's Managing Director Claire Robinson. "Transaction governance was an issue in a number of those situations."
The program was driven in part by the growth of new product types in the ABS and MBS markets and the attendant proliferation of unrated and lower-rated sponsors, Moody's analysts said in a report. The initial focus of the governance assessment program will be on areas of the market that are most sensitive to governance issues including: retail credit cards; equipment leases; whole business securitizations; subprime autos; and home equities. Eventually, TGAs will be a part of the ratings process for all ABS and MBS deals.
Specifically, Moody's will evaluate the internal quality of control mechanisms in place in a transaction that work to minimize or avoid the risk of errors in calculation and cash-flow allocation and the misappropriation of funds and assets, ensure compliance and quality financial investor reporting, and make sure there are no lapses in administrative duties.
The reports will cover certain features that are common to all structured finance transactions, such as control mechanisms for calculation of cash allocation and reserve fund withdrawal. However, TGAs will be further tailored to fit different asset classes.
"A transaction involving a student loan consolidator will be assessed according to the procedures typically put in place in such transactions to ensure compliance with various consumer protection laws," analysts said. "By contrast, Moody's will assess a securitization of subprime auto loans with an unrated servicer in terms of the deal's various trigger calculations."
In an equipment deal, Moody's will place more focus on the reporting and obligor concentration limit enforcement, upon substitution or repurchase of collateral, analysts added.
In general, the assessment will include two essential components: the quality of the documentation and the business strength of the various participants. The presence of an experienced and independent third party to provide effective oversight is also critical. For instance, a servicer's attempt to postpone a trigger event would be forestalled by the presence of an independent calculation agent that could verify the calculation of the trigger and notify the trustee of any attempt on the servicer's part to manipulate the calculation.
The engagement of a major accounting firm to spot-check or audit specific calculations can also prevent deterioration in the reporting quality at times when the accuracy of such reporting is most necessary.
The governance assessment will be an addendum to the presale report, but will not consist of a numerical score. As such, it will have no material impact on a bond's rating. "We always took these things into consideration when rating and analyzing a bond; this is basically just providing more transparency to the market," Moody's Robinson added.
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